John Maynard Keynes was right in 1923 when he declared, “In the long run we’re all dead”. One of MMPI’s trickiest tasks, when determining the suitability of products for prospective investors, is to assess the time-horizon preference of each individual. This can vary and will inevitably depend on a number of ever-changing factors.
A young person starting out in a new career may comfortably have a 40-year perspective for their pension investments. Naturally, such a long-term preference diminishes as the years roll by. Elsewhere, significantly different timeframes will most definitely apply to other life events such as saving for a house, paying for a wedding, planning a family, creating an emergency fund, building up an educational pot for college fees, etc.
Understanding these horizon preferences is an aphoristic reality but it remains laden with danger. As we travel through life, we don’t fully appreciate the time-horizon preferences that we set ourselves. They simply seem to fall into place – often imposed by circumstances like the death of a loved one, serious illness, redundancy, unfortunate hardship, etc. Aside from such dreadful events, our recognition of appropriate horizon timelines can be blurred by, say, optimism in good times and pessimism in tough times.
It is seldom that we have the admirable discipline to hold firm to our beliefs and ride out the rollercoasters of emotions that taunt our brains. Yet the failure to understand the importance of setting horizon preferences can be very disruptive for our finances. Our ability to recognise that our financial needs are not symmetrical and, therefore, require the imposition of time horizons is a really worthwhile trait; but usually our good intentions are lost in the miasma of everyday life.
MMPI takes the view that determining horizon preferences is as important as identifying risk tolerances, financial objectives and ability to bear losses, when assessing the suitability of a product for any potential investor. The practice does not receive the attention it deserves in regulatory guidance notes for retail investors.
Financial planning is a complex business but there is an evolutionary framework that helps consumers navigate the confusion. The recognition of objectives and goals; and the horizon preferences in which they are to be achieved is the starting point. Keeping it simple and undemanding is also hugely important. Finally, reviewing the objectives, goals and horizon preferences regularly is the final step.
Modest and unassuming – and avoiding jargon – that’s just great financial planning.
Naturally, it helps to have professional advisers like MMPI but establishing the framework and sticking to the discipline is the key. Day traders have very short time horizons of minutes or hours; professional investors have very disciplined horizon preferences for each segment of their trading activity. Unsuspecting consumers are swayed by rumours and gossip, while completely ignoring the rule of setting themselves horizon preferences. It is not easy to remain disciplined in the face of emotional tugging. However, for consumers to achieve their financial goals they must consider the principle of setting themselves strict time-horizon preferences.