Introduction to personal financial planning and pensions


Logic flow broadly from oldest (PFP1) to most recent

I postulate that for the majority “We spend a lifetime accruing wealth and almost no time learning how to look after our wealth”.  Tt is mostly because most people claim ignorance about investment and hand over that responsibility to others, few of whom are truly honest and professional, and many of whom are outright charlatans.

This is counterintuitive, because: –

“You can delegate a task, but you can never delegate responsibility”

i.e. If it all goes wrong, we have no recourse and cannot point fingers.  Yes, they are supposed professionals, but they are human and inclined to biases like projecting past performance forwards.  Therefore, I maintain it is up to us to educate ourselves to at least understand the basics, until we grasp the broad investment concepts, so that we can communicate semi-intelligently with our brokers and agree the ideal diversification strategies for the ruling economic situation.  Thereafter, it is up to the brokers to refine it and select the best fund managers.

NB! I prefer not to tell you what to do, but rather how to think, about your investments.  Inter alia, I feel that it is important that you read some of the articles written for lay people on this/my website  Like the economics articles Econ1 (about Fiat Money), Econ 2 (about Wealth), etc.; selected Technical Analysis articles such as TA3, TA4 and TA5 (about Risk and Diversification); and my Investment articles such as Inv101.  However, it is also important to read other books and authors as the topic is very broad and very important to your future wellbeing.

Personal finance is about accruing and protecting your wealth, mainly so that you do not end up eating dogfood at some point in the future.  This is always difficult, as a number that looks really good when you are 40 or 50 can be decimated by the effects of inflation or longevity.  This is increasingly difficult in an era of Fiat money and manipulated economic statistics, as you have no idea what the real inflation rate is.  Furthermore, longevity is a virtual certainty with recent medical advances, so you need to have enough set aside to live until you are well over 100.  Please note that most Pension Funds around the world are going to fold, or have to be bailed out, in the next decade.   At the very last they will end up reducing your benefits.  I am going start by summarising the reasons for this looming situation and elaborate in future articles.

Many of us tried to be responsible and prepare for old age by saving and contributing to pension funds, 401K’s, social security, etc.  Regrettably, many of you have been sold down the river, either by politicians, fund and investment managers’ greed, demographic change, technological change or circumstance.  Reasons are not limited to, but include the following:

  • Politicians used deficit spending, which was facilitated by Fiat money, to make promises of ever better pension provisions for government employees and better welfare benefits for the unemployed, infirm and aged, mostly in order to buy votes. Effectively, they made promises they will not be able to keep in the long run.  More specifically, they have borrowed against social security and pension funds and incurred debt to the point where they have burdened future generations with debt that they will never be able to repay.  This has severe consequences for both working people and pensioners;
  • Politicians have manipulated interest rates to the downside, with the result that Pension funds, which must always be pretty conservative with their investment strategies, were not able to achieve the approximately 7.5% returns needed to remain actuarially solvent. e. Many are currently actuarially insolvent, or virtually there; accordingly,
  • Pension funds had to adopt undue risky investment strategies in a search for higher yields by investing in risky assets including developing countries. This means they are at risk of taking a big hit when this historic bull market ends (true as at end July 2019);
  • People are living longer than expected and birth rates dropped.  Consequently, the number of working people contributing to the pension funds dropped from 4.5 to below 2.5 per pensioner.  In some countries, this ratio is 1.6.  This means fewer and fewer people are supporting a growing number of pensioners.   Therefore, pension funds increasingly do not have enough income to service the future needs of their pensioners, which exacerbates their actuarial insolvency;
  • Technology in the form of medical advances is drastically improving longevity by reducing disease and reversing ageing. They say the first people to live to be 150 have already been born.  Consequently, we need to revise our work / retirement strategy by working far longer, in that we cannot work for 45 years, to age 65, and hope to accrue enough money to retire for another 85.  This creates a self-reinforcing problem in that the pensioners are not retiring, so they are not freeing up the jobs for the youth;
  • Technology in the form of artificial intelligence, automation and robotics is making many people redundant by taking over all boring and repetitive jobs. This means unemployment is likely to rise, which would further reduce the number of contributors.

All this makes it critically important that people live as frugally as possible, start saving as early as possible, save as much as possible, save into multiple funds and work for as long as possible.  More important, they need to ensure their accrued wealth is preserved and not lost by some imprudent asset manager or decimated during a crash.

Selection of your broker

It is important to be extremely careful with your selection of a broker, as there are many charlatans out there.  Do not select them purely because they outperform other investment managers, unless they do it consistently and, especially, during market corrections and crashes.  Regardless, they must not project past market performance forward, but must be anticipative and focussed on probable future market performance.  They must be willing to adjust your portfolio when markets are nearing peaks, by adopting a more defensive strategy.  They must have a broad diversification perspective – see TA5.  There is a great saying that near market peaks, it is a time to be concerned with “the return of your capital, rather than the return on your capital”.  Therefore, they must not use the argument that “they do not need to adjust your portfolio to be defensive near market peaks, as markets inevitably rise again after corrections”.  This is because it is wiser to protect your capital rather than lose 30%, 50% or more of your capital during a correction or crash and then have to wait 7-10 years for the market to again exceed the previous peak in real terms (after adjusting for inflation).  Remember, if you lose nothing when everybody else loses 50%, you have suddenly become twice as wealth relative to the rest of the people out there.


Diversification across a lot of different shares, is not diversification, as all shares tumble during corrections and crashes.  True diversification is across all asset classes.  These should include different classes of Equities, Bonds, Money Market funds (Cash), Commodities, Property, Gold, Silver, etc.  Wealthy people even get into rarities and antiquities, since rarity “per se” never diminishes.  I call Property and the latter categories tangibles.  Obviously when equity markets have bottomed and commence rising, one can load up on equities.  However, one should continually be adjusting the above asset allocation as market risks fluctuate.  When markets are toppish, one should reduce one’s exposure to equites and increase exposure to other asset classes.

Caution as at July 2019

The current equity market boom is now over 10 years old and the longest on record.  Therefore, it is a question of when it will correct and not if it will correct.  Therefore, it is a time to be defensive, which suggests you should be concerned about the return of your capital and not be too concerned with the return on your capital.  Therefore, it is probably prudent to take be defensive until the markets correct, even if that takes a year or two.  I would put 50% in Bonds, 25% in Money Market funds (Cash) and up to 25% in both Gold and Silver, in both Physical and Equities.  i.e. I would be completely out of equities right now.

Equity market peaks

As equity markets approach their peaks, it is a time to be defensive.  However, these peaks are notoriously difficult to spot.  However, common sense will get you a long way.  For example: If everyone is talking about the markets as if they are an expert, the market is almost certainly overhyped and overextended, so it is time to be very cautious (defensive).  Similarly, the longer the markets have been rising, the more likely they are close to a peak.  When the press is reporting daily that the markets have set new records, it is also a good time to be cautious.  This will probably happen with Gold in the next 7-10 years, as it did in 1980.  Until them, I remain a Gold bull.


Do not underestimate yourself.  If you apply your mind and read the “for dummies” literature, you can teach yourself anything.  Nobody says you have to be an expert, but why be an ignorant fool.  You can be better than most at anything if you apply yourself and this is pertinent because it is one of those things that has a direct bearing on your future welfare.

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Disclaimer!  The content of this report represents the opinions of Mr Lodewijks, who is a retired Civil Engineer with diverse interests.  Where applicable, the content should be deemed informative guidance to get the reader thinking and not specific advice.

Mr Lodewijks is not a qualified Investment Advisor.  His investment reports aim to educate and help investors understand investment considerations and strategies.  As trading and investing in any financial markets may involve serious risk of loss, Mr. Lodewijks recommends that you consult with a qualified investment advisor.


Eelco Lodewijks

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