In Jim Collins' latest book (Great by Choice
) he offers a compelling illustration. Imagine two people in San Diego, California, who both plan to walk to the tip of Maine on the other side of the USA. It's a journey of 3,306 miles and they both set off one sunny Saturday.
Guy One walks 40 miles on the first day (the weather is a nice 20 degrees C); he walks 27 miles on the second (equally nice) day. By Day 3 he is on the edge of the desert and the temperature soars. That day he manages only 8 miles - it's scorching hot and he's exhausted from walking 67 miles over the previous two days.
In contrast, Guy Two does only 20 miles on the first day. He could easily have done another ten, but he has a clear goal of 20 miles every day. He walks 20 miles on the second day. On Day 3 he is fully rested and manages a decent 20 miles even though it is baking hot.
Guy One cracks on whenever the weather allows but rests up when it's against him. When he hits the snowy, windy, high mountains of Colorado he covers barely any ground at all. In fact he is so exhausted he catches a heavy cold and has to stop for a week.
Guy Two just does his 20 miles every day. It's a 20 Mile March whatever the weather. No exceptions. It means he arrives in Maine several weeks before Guy One. In fact, Guy One is lucky to make it at all, such is his inconsistency and hopeless reliance on the weather.
Collins is neatly illustrating the benefits of solid consistency over fair weather sporadicity. The former always wins out in the long term.
Adopt a 20 Mile March approach to managing the risks in the pension scheme. You have no way of forecasting when it will be a 20 degrees (C), perfect, sunny day for hedging the real yield.
The best economists, asset managers and investment consultants have tried and spectacularly failed to predict “the right time” to hedge against this most pernicious and insidious of risks.
That’s why every newspaper is headlining “Pensions Massively Underfunded as Liabilities Soar.”
What they should be screaming is: “Pensions Massively Underfunded as Unhedged Liabilities Soar Due to Systemic Failure to Implement a 20 Mile March Strategy.”
There is only one effective approach: The 20 Mile March. Hedge a bit of your risk every month until it is all hedged. No pension scheme that has taken this approach at any point in the last 10 years now regrets it. Not one.
Since Dec 2, 2003, when Friends Provident Pension Scheme hedged its risk
, many others have embarked on their own 20 Mile March (vis-à-vis hedging risk, diversifying assets, achieving target funding levels) and are now sipping a dry Martini on the verandah of the highly rated Bayview Hotel
, Bar Harbor, Maine.
If you are still huddled in a snowbound cave somewhere in the Colorado mountains waiting for sunny blue skies, chances are you didn't have a 20 Mile March Game Plan.
It's (probably) not too late.
Tomorrow, whatever the weather, do 20 Miles.
[Please note that all opinions expressed in this blog are the author’s own and do not constitute investment advice. Click here for full disclaimer]