I’m sure you’ve all read the article by José Mª Díaz Vallejo in which he discusses a topic that is as little-known as it is unpopular: considering and setting the return target for our investments in the markets over the course of our lives. He very aptly calls it Personal Benchmark, and defines it as «the annual return target based on a longer-term target«. Simple, yet vital and by no means obvious. As this issue relates to the evolution of a person’s wealth throughout their lifetime, it forms part of the standard analysis we carry out as a Multi-Family Office. José Mª, would you mind if we ran a few thought experiments based on your concept? Here we go:
We usually hear the word benchmark associated with fund managers, indices, charts, etc., and we equate this with target a target to reach or exceed. But JMDV applies this wisely to his own investment profile:
- Beating inflation in the long term (4%)
- Developing a pension plan with a 40-year time horizon
- Start-up capital
- Time remaining (40 years)
- Dividends
- New regular contributions
Based on these variables – which only he himself and the passage of time can clarify and refine – he estimates that he will need an annual return of 8–9% over 40 years to reach his Personal Benchmark desired. Let us consider this benchmark as an example type of a 25-year-old, but which could be extrapolated – with a few adjustments – to any of us if we imagine it in our own terms.
Let’s move on to the experiments now and explore this concept of personal benchmark: First of all, let us consider that regular contributions not only can, but must to grow at an accelerating rate in line with our professional and career development, or even our potential future inheritance, if any. We must also bear in mind that our personal development will likely mean we are unable to maximise our contributions. In other words, over the years we will probably share our lives with partners, buy property, possibly support children… and perhaps even become parents ourselves.
We do not know what the future holds. Perhaps our career progression will be meteoric or mediocre, or perhaps our health will be poor. Family circumstances will also affect the growth of our wealth: for example, we may need to set aside substantial sums of money for personal and/or healthcare for elderly relatives. Or we may have to rescue our nieces and nephews from destitution because of the foolishness of our dim-witted brother-in-law. All these variables – which also change over time – force us to constantly adapt our personal benchmark.
Another factor to bear in mind is happiness: in other words, it is not only our personal development that will prevent us from maximising our regular contributions to wealth growth. We must also find happiness along the way. After all, it will be of little use to us to be the wealthiest yet most embittered pensioners in our circle, however eager our descendants and heirs may be, hungry for property and fresh cash. Our financial and wealth growth throughout our lives must allow us to strike a balance between financial optimisation, happiness and well-being – a balance that only we are capable of intuiting and shaping.
Savings/Investment and Happiness/Well-being are not always interconnected, as one might think. It is true that most of us tend to go to extremes when allocating resources in the pursuit of happiness and well-being. Such excesses often result in our financial progress becoming increasingly mediocre over time. And because of this mediocrity, as the years go by, we will be forced to recklessly increase our personal benchmark. The consequence of this is that we take on fatal risks, which, at best, will cause us to build up and lose wealth cyclically throughout our lives, thereby turning our lifetime financial progress into a financial rollercoaster. But at the other extreme, sometimes the massive concentration of resources for reinvestment and the pursuit of our benchmark, causes us such distress and unhappiness that we will be unable to achieve a stable personal life. This personal, family and social unhappiness will also have a negative impact on our ability to create wealth, thereby also hindering the personal benchmark designed.
The ideal balance is personal and unique to each individual, and can only be achieved by masters of life. Furthermore, only the final result determines whether we succeed or fail, and during our youth we will have no indication that would allow us to make adjustments based on interim results. As my favourite quote on the sidebar of our blog says: «…we don’t learn to live until life is gone».
We are also going to introduce other types of assets, such as property and businesses, into our experiment with the personal benchmark, as clearly defined by JMDV. It is evident that if we only take our cash holdings into account, the 8-9% set as a long-term target will deviate significantly – either by falling short of or exceeding – the personal benchmark that we will need throughout our lives. All our assets, in every possible form, will influence the definition and development of our benchmark.
Let’s carry on with the experiment. Let’s try to balance this benchmark as if it were an accounting balance sheet with its classic formula: Assets = Liabilities + Equity, but adapting it to our financial situation. Taking into account all our assets (cash, businesses, property, etc.) and all our liabilities (debts, mortgages, etc.). But we will also add to the liabilities our cost of living – that is, the amount of money we spend (for those with small estates) and the amount we would like to spend (for those with medium or larger estates) – including the cost of repaying any mortgages we wish to take out. What our Multi-Family Office once dubbed Vital Balance, which includes our Wish List or wish list. You can find further details at: His current wealth is enough to turn his life around.
But let’s take it a step further and have another look at the personal benchmark turned into life balance. We are now going to introduce intangible assets and liabilities – that is, those that cannot be easily quantified in monetary terms or valued in the same way as a business or a house. We are referring to values that are just as important – or even more so – to our lives, such as family, time, philanthropy, starting up businesses or pursuing long-cherished activities, special trips, and so on.
All of this, tailored precisely to each individual or family, will enable us to design the restructuring required for our assets to cover our liabilities and continue to grow and progress at the desired rate. This growth must, of course, exceed a constant average rate of inflation, which, incidentally, we also estimate at 4%. However, let us clarify that we must consider three types of growth here: cash flow growth, corporate growth and property growth in the form of mortgage repayments. To balance the books, we tend to disregard growth arising from property capital gains, and this is particularly advisable in the current cycle.
As you can see, the Personal Benchmark as defined for our cash, forms part of this Vital Balance, in a way. The family’s overall financial situation and how it has developed will give us a clear idea of what we call PGR: Global Wealth Plan.
Therefore, José Mª, your very insightful comments on the Personal Benchmark could be included as one of the many components of a PGR. And I think your article is highly recommended for all investors, regardless of their investment style: fundamental, technical, value, contrarian, sui generis and, above all, for the one that is most prevalent: the chaotic one.
Although, in our view, the best course of action for any investor is to draw up and periodically adjust their PGR, I think it is extremely dangerous that the vast majority of investors do not even consider at least one personal benchmark. Those who merely focus their benchmark In the annual benchmark index, they are nothing more than small inflatable mats on which their landlubbers splash about, pretending to sail across a vast ocean. When the sea is calm, they move almost in parallel with other vessels, believing themselves to be true sea dogs. But when storms and rough seas strike, only the reliable, powerful and well-skippered vessels stand any chance of surviving until calm returns. The rest will continue to work hard right up until retirement to make up for what they lost on the high seas.
Forget the inflatable mats and start thinking about your Personal Benchmark and Global Wealth Plan. You’ll be glad you did when you’re older.