This is week 11 of the 14-week Bermuda action plan to improve your financial lifestyle.

Your action plan is now knee-deep in the review of investing and pensions. In the next two weeks, we will:

• review the performance of a balanced pension selection,

• provide a very simple calculator to track (on average) how your pension is performing,

• another calculator to project some possible estimated amounts to expect for retirement,

• discuss the differences in rates of return for conservative, balanced and aggressive portfolio relative to your age and years of employment in the workforce, and finally,

• investment fees, and their impact on appreciation of your pension.

Everyone, who invests, yes, even in one’s pension, wants their investment to be the one where values only go one way — upward. In other words, investments guaranteed to succeed and never, ever show losses. We cannot help wishfully thinking that such an investment utopia is really true, but it is not.

Investments in capital markets are subject to many oscillating variances and trends: interest rates, consumer drift (away from once-in-demand products), global currency fluctuations, political instability, consumer inflation, employment statistics, governmental firm hands — or not, credibility of security valuations, and so on. These often unexpected variables can increase or decrease volatility on a short-term basis to affect the value of investments.

Pension fund management, generally, is geared toward much longer timeline environments. And, statistically, long-term stable investments and their indexes, for example, tend to appreciate upwards, albeit with short-term losses along the way.

Feedback received by me over the years on pension investment activity goes like this: “Why do I, as an ordinary person, have to cope with all of these crazy terms, try to pick what I think is best for me when investments are so hard to understand, and then have to watch their performance run up, go down, and vice versa? Sometimes, I feel so helpless with so little control.” Then, some individuals may go on to say that they would rather have all of their cash in savings accounts — cause at least they know where it is.

Why does anyone invest in capital markets and their underlying securities, of all types? Cash in term deposits just may not accomplish the savings goals for many people, yet investments have done the job.

1. Because the opportunity for appreciation is significantly better, sometimes astronomically so, than placing pension funds into cash accounts. Additionally, the universe of securities is full of diverse choices, allowing a portfolio manager to pick hundreds, sometimes thousands of small security positions over a very broad range thereby minimising the risk of loss.

2. Stretching your purchasing power — always impacted by constantly rising inflation (groceries, healthcare, insurance, utilities, etc) on our small island. Beating inflation is critical for a satisfactory lifestyle. Your money needs to earn something (interest, dividends, capital gains) to outpace inflation in Bermuda, particularly, with the high erosion of your purchasing power — and what you actually receive for each dollar you spend.

3. Broad diversification (otherwise known as asset allocation) to spread out the concentration of risk with currencies, country-specific securities, businesses, and industries. Remember that local investors concentrated in domestic investments experienced higher losses in security values than those in more diversified global investments during the ill-fated market downturn of 2007-2008.

If you are completely turned off investment markets, your pension should be invested only in a cash product. This means that you will have to save more cash due to the low compounding interest rate environment — that seems to be staying for another year, or thereabouts, if the opinions of market watchers of the US Federal Reserve Chairperson are to be believed.

What is a pension fund generally comprised of?

Let’s stick to a simple formula for now: stocks of large and small publicly traded companies (think Apple and Netflix), bonds of sovereign governments, large and small corporations, etc (think US Treasuries, UK gilts, Bank of America bonds, Deutsche Bank bonds), cash (generally, money market funds that can be converted into real cash). Smaller percentages may be invested in more aggressive positions such as commodities, hedge funds, and private equity. See the balanced fund chart courtesy of About Money. http://www.about.com/money/

Do you think MZP — MamaZina Pizzarina’s company is a private equity company or publicly traded?

How is my pension portfolio doing (and constructed)? It depends upon the pension administrator firm and its investment managers. A balanced fund is very popular and is offered by at least one Bermuda pension provider, along with conservative, aggressive, etc. Balanced fund risk is relative, not too conservative, not too aggressive.

Composition of the balanced portfolio security holdings is focused generally around 60 per cent stock and 40 per cent bond positions.

What are rates of return on average for five to ten years for balanced funds? I’m not going to give you any names otherwise, I’ll be accused of bias toward a particular pension provider or product.

You can review rankings, via Morningstar and Zacks, for US-based mutual funds. These return ranges assume that the investor remained in the market, and did not change allocations during the entire ten-year period through midyear 2015. And, more importantly, the funds are not held within a defined contribution structure such as the Bermuda National Pension (Occupational Pension) 1998 Act. Thus, fees are lower in US funds, than on a domestic basis, due to the significantly lower cost of administration. To be discussed in-depth next week.

However, it is worth noting that in comparing average returns, then subtracting the higher administration fees in Bermuda from the US ranges, the long-term return on investments is rather similar and rather surprising.

A question for you to answer for next week — what has your pension generated for you in investment returns, net of all fees?

We will look at conservative, balanced and aggressive over a ten-year period between 2005 and 2014.

Where is your pension fund? Currently, there are four pension administrators. Two provide very detailed information on their websites that is publicly accessible. The others, it is assumed, provide information only to individuals whose pensions are held there (by security login). I will endeavour to obtain their information for next week, perhaps even a reader can provide a redacted pension statement to me.

A thought about last week: Your homework, if you will, was to review your pension statements to assure yourself that all of your contributions are there. Are they?

Sources: Chart and link from About Money: A beginners guide to investing and what is a mutual fund family. http://beginnersinvest.about.com/od/mutualfunds1/tp/mutual-funds-investing-guide.htm

Martha Harris Myron CPA PFS JSM, Masters of Law: International Tax and Financial Services. Appointed to the Professional Tax Advisory Council, American Citizens Abroad, https://americansabroad.org/. The Pondstraddler* Life™ Consultancy providing financial planning, publications, presentations for Bermuda residents, their multinational families and connections. Contact: martha@pondstraddler.com