27 and out

by Doug Brodie

 

/1. 29.2% per year 1977-1990: his golden rules to invest by.

Peter Lynch took the reins at Fidelity’s Magellan fund in 1977 when it was worth $18 million. He grew it to $14 billion and averaged 29.2% per year. Against normal convention, he also grew the number of stocks he owned from about 60 to over 1,400.

“In 1989, just before relinquishing the management of the Magellan fund, he published his best-seller "One Up on Wall Street", published by Simon & Schuster. The book provides an insight into his investing approach. He popularized the idea of "Growth at a reasonable price" (GARP). He used the ratio PEG (PE ratio divided by per share growth rate) as a metric. He regarded PEG ratio of 1.0 or lower to be an indicator of inherent value. He preferred stocks with sustainable growth.” Wiki.

“Know what you own and know why you own it.”

return to top

/2. What is your Funded Ratio? How much do you need?

“Your personal funded ratio measures how much money you already have, and are likely to have after your future savings, relative to the amount you’ll need to support your post-retirement ambitions.  Over 100% is good, under 100% suggests that you ought to think about doing something about it.” – Don Ezra.

Don’s an actuary who writes about retirement planning. When he writes about the Funded Ratio it is with the hindsight and focus that an actuary has in calculating the amount of money needed by a pension scheme. You have your own pension scheme – it just has only one member.

One way to look at this is to work out how much you’d need to buy an annuity that would fix that required amount of income for life. This is what Don refers to as the safety-oriented figure, and against that he also suggests that you look at a hoped-for ‘best estimate’ figure, that being a sum that is credited with an investment-risk premium. The point of the latter is that if there is no upside premium for taking an investment risk that Rational Person would not do so, ergo for the investment market to exist (to have existed) their must be a premium over the risk-free rate.

There are two numbers that you can use for calculating your Funded Ratio – one is liquid assets (cash, pensions, ISAs, GIAs, investments); the other one is total assets which includes your house(s).

You and I grew up with horror stories of equity release calamities in the Wild West of the 70’s and 80’s in the west midlands however that has now completely changed. Leaving aside the ‘principal home’ relief, you can either ‘leverage’ your home or leave 40% in IHT to the Chancellor.

If your funded ratio is less than 100% that means that the current day value of all your expected expenses is more than the money you have; you can tweak your ratio by saving more, or retiring later, planning on a more prudent lifestyle or increasing investment risk to meet the shortfall.

What happens in calculating that ratio is starting the planning process with the conclusion and then working backwards from there; that is the correct way to run liability calculations. However, in the retirees case in the UK, we don’t know how long the retirement will last or what the fixed costs will accurately be. Retirees have a very simple way of dealing with this to ensure books are balanced – they simply adjust lifestyle costs.

Don defines the term ‘rich’ as being the implication that your personal funded ratio is more than 100%. Mr Micawber would agree.

“The Psychology of Spending
A common trap in retirement planning is mistaking accumulation for aspiration. People often walk into financial planning meetings with goals that aren’t really their own. They’re mimicking what society says they should want: a second home, a luxury car, a certain number in the bank. But these “goals” are often more about comparison than clarity. The real breakthrough happens when you pause to ask, “What do I truly value, and how do I want that to show up in my life?”” www.retirementresearcher.com

return to top

/3. Death, IHT, and what happens if the value falls before you can sell the assets?

There is an unfair oddity that probate value of an asset is that value at date of death, the executors can’t sell the assets without probate, and from submission of all the correct documents the grant of probate takes around ten weeks. The iniquitous issue occurs when the value of (say) a portfolio falls between date of death and grating of probate, as the estate then has a higher IHT liability than warranted at sale. To deal with this you submit an IHT35 form to claim tax relief.

In summary from our chums at Aberdeen:

The rules

There are, of course, conditions which must be met in order to claim the relief. Broadly, these are:

  • The shares sold must be 'qualifying investments'
    These include shares and securities listed on a recognised stock exchange, authorised unit trusts and OEICs. Unlisted shares, AIM shares and investment bonds are not qualifying.

  • The shares must be sold within 12 months of the date of death
    If during the period since death shares have become suspended or shares have been cancelled because a company is no longer trading, relief may still be available. Suspended shares will deem to have been sold at the end of the 12 month period for their value at that time and any shares that have been cancelled will have deemed sale proceeds of £1.

  • In addition to actual sales of shares, shares transferred to a beneficiary in satisfaction of a pecuniary legacy in the will, and with the consent of the beneficiary, also count as sales. But this is only where the beneficiary is entitled to a fixed cash amount from the estate rather than a share of the residue.

  • Claims must be made within five years from the date of death
    Although the sale must be made within 12 months of the date of death, the claim for relief can be made up to five years from the date of death. Relief is claimed by completing form IHT35.

  • The shares must be sold by the appropriate person
    The appropriate person is the person who is liable for the tax. This will usually be the executors/ personal representatives dealing with the assets in the free estate. It could also be the trustees who may be liable for paying tax on a trust in which the deceased held a qualifying interest in possession.

return to top

/4. Why it’s never about money - Pascal’s Wager.

Back to the early 1650’s the renowned mathematician Blaise Pascal was approached by a friend to help resolve a probability issue dealing with the likelihood of a 6 with one dice (ok, ‘die’), versus a double six with a pair of dice. Their correspondence in 1654 lay the foundations of the development of probability theory, and from that the very beginnings of the modern casino.  

Pascal continued through with his probability reasoning to define his famous philosophical dilemma known as Pascal’s Wager:

“Pascal’s involvement with probability theory didn’t stop with the Chevalier’s dice game. His famous philosophical dilemma, now known as Pascal’s Wager, posed a binary question: ‘Does God exists or not?’ Pascal reasoned that if you believed in God’s existence and were wrong, the downside was minimal. However, if you bet against God's existence and were wrong, the consequences could be eternal damnation. As such, Pascal underwent a profound personal transformation, turning away from mathematics and embracing a life of religious devotion locked away in a monastery for the remainder of his days.
If you could trade that one bird today for two tomorrow, that sounds like a pretty good deal. But it could take years to actually snag those two birds from the bush. Is the risk still worth taking? The answer lies in weighing the odds - calculating risk, just as the Chevalier de Méré did when pondering probability centuries ago.

Then there are cases where someone will over pay for your bird, in the belief that someone else will pay them a higher price tomorrow. This they call the "greater fool theory," which is not investing at all - it involves no shrewd calculations, no weighing of risks, just the giddy hope that someone else will come along with even wilder dreams and greedier aspirations tomorrow.” Rockandturner at substack.

return to top

/5. Not ‘same same’, or is it? US v UK on CPI records over the last 25 years.

Data comparing UK v US in indices and in CPI, covering twenty five years.

/6. Your biggest threat to independence in retirement.

Cameron Tudor and I have a game: as a physiotherapist he finds recalcitrant muscles and tendons in my shoulder and then sees if he can exert sufficient pressure to get me to squeak. To understand this game you need to know that Cameron is Australian and I am Scottish, that’s the nub of the competition.

As a man who owns physiotherapy and mobility clinics, he’s an expert on the issues of mobility through age. This is his recent note of the subject – and remember there is no way that any amount of pension or retirement wealth can compete with the desire and wish to remain healthy and mobile. In fact health is the one attribute that we would swap everything for if it was a binary decision. 

“As we age, the desire to live life on our own terms becomes more important than ever. While financial security plays a role, the real key to maintaining freedom and quality of life lies in staying physically independent. Nobody yearns to be helped from a chair.

At West London Physio, our job is to help people navigate the challenges of ageing and manage the inevitable aches and pains that come with staying active. In this slightly longer newsletter, I'll outline what I see as the key cause of losing physical independence and why it's crucial to be address it early. 

What’s the Biggest Threat to Independence as We Age?
The number one reason older adults lose their independence is a decline in physical ability due to muscle loss, a condition known as sarcopenia. While ageing naturally brings changes to our bodies, the loss of muscle mass and strength is something we can slow down, and even reverse, with the right approach.

What Is Sarcopenia?
Sarcopenia is the gradual loss of muscle mass and strength, which typically starts in our 40's and accelerates after 60. This isn’t just a superficial change; it impacts your ability to perform everyday activities and increases the risk of falls, frailty, and chronic health issues. 

On average, muscle loss happens at a rate of about 3–8% per decade after age 40, with the decline speeding up after 60. Factors such as inactivity, hormonal changes, chronic inflammation, and poor nutrition all play a role in this process.

The first step in fighting sarcopenia is recognising that it is certain to happen; the second is taking action. By focusing on building and maintaining muscle, you can greatly improve your health and quality of life as you age. But remember, if you want to stay active at 80, you need to start planning in your 40s, 50s, and 60s.

Why Do We Lose Muscle as We Age?
Muscle loss isn’t simply a result of ageing, it’s also driven by lifestyle factors.

  • Hormonal Changes: Growth hormone and sex hormone levels decline with age, making it harder to maintain and repair muscle tissue.

  • Reduced Physical Activity: Modern life often leads to more sedentary habits, and unused muscles weaken over time.

  • Poor Nutrition: Many older adults don’t consume enough protein or nutrients to support muscle health.

  • Neuromuscular Decline: As we age, the communication between nerves and muscles weakens, reducing strength and coordination.

What Happens to Your Muscles on a Microscopic Level?
Two main changes occur in your muscles as you age: 

  • Loss of Fast-Twitch Fibres: These fibres are responsible for quick bursts of strength and power, like getting up from a chair or climbing stairs. When we lose these fibres, even simple tasks become more challenging.

  • Decreased Muscle Protein Synthesis: The body’s ability to build and repair muscle declines, making it harder to maintain muscle mass.

Understanding these changes is crucial because they underline the importance of resistance training and protein intake. You need both to keep your muscles working efficiently.

The Metabolic Impact of Muscle Loss
Muscle is more than just strength and is essential for overall health. When we stumble, it’s our muscles that keep us from falling. When we go for a long walk it is our muscle's endurance, supported by cardiovascular fitness, that keeps us going. But, muscle also plays a vital role in metabolism.

The main metabolic consequences of muscle loss are:

  • Insulin Resistance: Muscle helps regulate blood sugar levels. Without sufficient muscle, the risk of insulin resistance and Type 2 diabetes rises.

  • Increased Body Fat: Less muscle means fewer calories burned, which leads to increased body fat.

  • Metabolic Syndrome: The combination of less muscle and more fat increases the risk of high blood pressure, high blood sugar, and elevated cholesterol levels.

  • Chronic Inflammation: Sarcopenia is often linked to low-grade inflammation, which worsens muscle loss and metabolic issues.

Can Older Adults Really Build Muscle?
There’s a common misconception that once you reach a certain age, it’s too late to build muscle. But that’s not true. Research shows that even individuals in their 60s, 70s, and beyond can significantly increase muscle mass through resistance training. While it may be harder due to anabolic resistance (the body’s reduced ability to respond to protein and exercise), with a good resistance program and diet, muscle growth is possible.
To maintain muscle strength throughout life, the goal is to create an environment where muscle protein synthesis outweighs muscle breakdown.

How Can You Prevent Muscle Loss?
Here are two key strategies to combat sarcopenia:

  • Adequate Protein Intake: Muscles need protein to grow and maintain their mass. Aim for 1.2-1.5 grams of protein per kilogram of body weight daily. For a 70 kg person, that’s about 85–100 grams of protein per day.

  • Regular Resistance Training: Resistance training is effective at any age. Muscles adapt when they’re challenged, but it requires regular effort. Gentle movements aren’t enough; you need to push your muscles beyond their current capacity. Afterward, your body will use the protein you've eaten to repair and grow stronger muscles.

Why Put in the Effort?
Building and maintaining muscle isn’t just about living longer; it’s about living better. Strength training helps bridge the gap between lifespan (how long we live) and health span (how long we live in good health). By keeping your muscles strong, you maintain your independence and quality of life. 

  • Inactivity vs. Weight Training: Which Is Riskier?
    Many older adults shy away from weight training, fearing injury. But inactivity poses a far bigger risk.

  • Inactivity Risks: Muscle loss, increased frailty, higher risk of metabolic disorders, cardiovascular disease, and decreased bone density.

  • Weight Training Risks: When done correctly and introduced gradually, resistance training carries minimal risk - beyond some expected aches and pains in the early stages - and offers immense benefits for maintaining health and strength

The bottom line is that while soreness after a good workout may be uncomfortable, inactivity is a far greater threat to your health and independence as you age. 

If you have pain or injury stopping you being active, or you need help designing the right exercise program, we're here to help.  camtudor@gmail.com, or on 02079371628

Keep moving,
Cameron”

return to top

 
 
INVESTING SHORTS, CHANCERY BRAINdoug brodie