IN TIMES OF CHAOS CHOOSE TO INNOVATE He was right of course. Volatility in this context • Whereas, for someone very close to their means very little. You see, the same technical planned retirement date, a loss that causes them measure of risk for someone 40 years away from to delay retirement by five years would have a planned retirement at age 65 means something greater consequences, since they could have: very different to someone only 5 years away. If – Less time to make meaningful contributions both investors hold a portfolio of equities, then to take corrective action both would face: • Volatility of, say, 18% (based on capital market – Fewer years for investment performance to assumptions centered on U.S. large-cap come back equities) – Less time to adjust their spending needs • A 1-in-20 drawdown risk of about 40% (a Furthermore, there may be other reasons why 1-in-20 risk reflects a degree of certainty working for longer than planned is simply not an event could occur 1 in 20 years; 40% realistic. represents the size of market movement during that hypothetical event) This translation of a technical risk expression into a real-world consequence could allow members This is the risk we might see on our portfolio a better way to understand their personal risk management screens but it is not the risk that tolerance and their actual risk exposure. members experience. • Do I have other sufficient assets to support The real consequence of this risk occurring is that my retirement? someone may have to delay their retirement— • Could I work for longer? but by how much? We can think of this risk as the additional years required to receive the same • What are the trade-offs if I reduce that risk? pension. Imagine a risk event that causes a saver So, what saved the meeting? Well it turns out to delay retirement by, say, five years. The effect the key was listening and responding to the need on a member would differ depending upon how behind the question. The simplicity and clarity of many years away their planned retirement is. For addressing the underlying concern left a palpable example: sense of relief on the trustees and a path forward. • A risk event that occurs a long time prior to For me, it was the start of a special journey to a member’s planned retirement could have outcome-based investing that has shaped my very little impact on that person delaying career to this day. retirement, since they would potentially have: – Many years for investment returns to recover and get them back on track – Many years to pay more in contributions – A plan to have less in retirement 22