Still here more than 2,000 years later

The umbrella has been around for more than two thousand years and over that time the fundamental design has barely changed. Even the current design hasn’t changed significantly since 1928 so it must be doing its job.  The basic structure is still a flexible folding canopy, typically a fabric of some kind, supported and stretched taut by metal ribs.

Today’s umbrellas are inexpensive and easy to manufacture so we don’t really question their efficiency, yet the average person will end up buying at least one every year. Why? Because they break easily. Yet despite that, the umbrella has become a handy metaphor for financial protection.

As a metaphor the umbrella works well, but not necessarily the way we imagine. If we think of our savings and investments as a financial umbrella, then we want it to protect us when we need it, especially when financial clouds are gathering. But when the economy gets hit by a severe financial storm, too many portfolios end up looking like the tattered remains of an umbrella after a rain storm. For some the experience is so bad they never want to venture into volatile markets again and instead tuck all their money in ‘safe’ assets to be eaten away by inflation.

But what if we could re-engineer the umbrella to make it storm proof instead of just rain proof? And if we could do it for real umbrellas, could we ‘storm-proof’ our savings and investments too? Well, I don’t know much about umbrellas, but New Zealand’s BLUNT™ and Germany’s Senz⁰ do.

THE WORLD’S BEST UMBRELLAs?

Are BLUNT™ of New Zealand and SENZ⁰ of Germany the world’s best umbrellas? Well, the Wall Street Journal wrote “structurally, the Blunt falls somewhere between suspension bridge and NASA space probe” and Time Magazine nominated the Senz⁰ as one of the best inventions of 2007.

At first glance they look like any other umbrella, but look again and you notice differences like the Blunt’s rounded tips and scalloped edges or the Senz⁰’s asymmetric shape. These are not simply cosmetic; they are the result of testing umbrella design to destruction. These umbrellas have been tested in wind tunnels and drenched by high pressure water hoses. The Blunt has even been shot with paintballs (to mimic hailstones) whilst parachutists have jumped from planes holding a Senz⁰ to show how it stays open in the wind!

As a result of this both the Blunt and Senz⁰ umbrellas are not just rain resistant, they’re storm resistant. Of course, in severe conditions they’ll still get a bit bent out of shape, but they’ll offer greater resilience and protection long after other umbrellas have been smashed to pieces.

Yet despite all the testing and redesign Blunt umbrellas don’t look very different to regular everyday umbrellas. They’re not throwing out 2,000 plus years of design and evolution, but instead are using advanced design features to improve performance in adverse conditions.

The same is true for those rare portfolios of savings and investments that are designed to withstand today’s financial shocks. They don’t look all that different to other mainstream portfolios, until you look at their construction, and realise the amount of testing they’ve also undergone.

Yes, you could argue that storm proof umbrellas cost more, which is true unless you’re paying for fashion or a label. But that ignores the fact that you’ll only buy once instead of often, and that your umbrella will quickly get back in shape, and remain unbroken even after it’s been blown inside out, unlike most other umbrellas.

 

The INVESTMENT umbrella test

Knowing what you now know if I asked you to choose one umbrella to last the rest of your life, do you think a wind tunnel would help you? And if you only had one umbrella to last your lifetime (think of that as a metaphor for your pension) would you become more conservative in your choices? Would you eschew fashion and colour, and look more at design and construction? Would you demand proof of how it performed under tests?

If you applied this to your savings and investments what would you do differently? You see, most portfolios I’ve seen I would describe as ‘fair weather’ portfolios. They perform OK provided everything is ticking along, but are often unable to recover from some of the extreme financial shocks we’ve witnessed in recent years.

One of the problems is ourselves. As investors we are apt to follow ‘star’ fund managers, or get sucked into investment bubbles like internet and technology stocks. We’re attracted to ‘hot-tips’ and we become victims of own investment biases. Rarely do we have a plan or a set of investment rules to follow, let alone any sort of catastrophe testing or planning. But that’s where the objectivity of academic research and the rigour of financial planning can help.

For example, when we construct investment portfolios for clients we take time to first understand what their investments need to deliver for them, now and in the future however long that might be. If we’re managing a pension fund we’re acutely aware that for most this is likely to be the ‘one umbrella’ they’ll have for the remainder of their life.  Our role is to ensure it continues to protect regardless of the financial conditions along the way.

The planning and investment software we use mimics an investment wind tunnel, a drenching from a fire hose, and the splattering of a paintball gun, to show you what might happen. Investment returns don’t travel in straight lines so we don’t give you ‘straight-line’ investment projections that show you everything will be alright. Instead we’ll look at what happens if the markets suddenly collapsed on the day you stopped working and your pension fund got hammered. We call it ‘Umbrella Testing’ for investments.

It’s an unusual approach, but it’s an approach that gives our clients greater clarity and more certainty than they’ve had before.