VALUE INVESTING
The Risks of Age

By Stephen Bland (TMFPyad)
June 29, 2001

No companies that I consider it worth writing about have appeared this week, so time for another ramble.

I have in mind with this article not those annoying little physical deteriorations that have an increased risk of appearing as one grows older, disappointing that it is that one is less and less able to, well you know what I mean, read the small print on insurance policies, stuff like that. I can still beat my sixteen-year-old son in a hundred metre sprint though. And no, the fact that he has currently a leg in plaster following a skiing mishap is nothing to do with it.

The risks of age upon which I will comment here are those concerning investment in general and value investing in particular. What degree of risk with investment is appropriate to particular ages of investor, if any?

Take an investor trying to build up a retirement fund through some form of regular savings. Call it a pension plan if you like, but I have in mind any scheme that is intended to provide for later life, not merely that which is known legally as some kind of official pension arrangement.

Traditional investment advice states often that risk investments, which in practice usually means equities, should be used until (or maybe until a couple of years before) the fund is drawn upon for income and at that point it should be reinvested; primarily into fixed interest holdings or insurance company income products like "maximum income bonds". (I loathe the way the insurers have hijacked the word "bond" to give this stuff an aura of solidity. "My name is Bond, Max Income Bond", somehow just don't ring right.) The idea is that the income from fixed interest or insurance income investments is more certain than share dividends while at the same time the capital is more secure as well.

This could be encapsulated as the older you get, the less risk you should take. As with most investment advice trotted out all over the place, I am not sure this is necessarily good counsel.

As many readers will know, my High Yield Portfolio is one manifestation of this disagreement. With this, I advocate that investors with lump sums looking for income should, instead of running to the nearest IFA/insurance company like so many do, invest in a portfolio of leading blue chip shares offering above average yields and simply sit back, do nothing and watch the dividends roll in and increase year on year, without paying any charges to anyone either.

So I suggest with this that these older investors, far from shunning risk, should positively court it in order to reap the tremendous advantage of an increasing income with the likelihood of capital growth as well. Now this comes with some risk of course and nobody should imagine that an equity income arrangement is as secure as most non-equity investments, either in income or capital. But because the portfolio is well sector diversified and sticks wholly to top quality shares, even at the expense of lower yields, the risks, though they exist of course, are not that great in my view for the investor prepared to buy and hold.

What of the value investor? Most serious value players will be holding portfolios of varying numbers of such shares, which is clearly the most sensible way to play the game in contrast to my style. But should you be investing in value shares with the accompanying risks at 70 even if you were prepared to do it at 40? Depends on individual circumstances of course, there can be no universal answer, but in general I would say yes.

I see value investing as a low risk approach amongst equity investing styles despite the recent failure of Independent Insurance. When done properly, for example by sticking with clear criteria and refusing to go outside them, the gains should far outweigh the losses over time. But losses there will be, occasionally.

In conclusion I believe that an older person should be doing exactly the same as a younger one with value investing, or indeed whatever style they know works for them. If it is successful for you between 40 and 50 say, then why should it not be between 60 and 70? And you probably enjoy it anyway and one of the keys to a successful retirement is to be active in things you enjoy doing.

The standard advice on age and investing is wrong, in my view.