An investing note for the Day of the Dead

“Mummy, when are you going to die?”

Hmmm… the six year old gets more and more complicated with her questioning.

I tried assuring her that Mummy wasn’t going to be gone anytime soon. Let’s hope! Then I realized it wasn’t an emotional question coming from fear, it was a practical one. Definitely my child.

Her grandpa (who is approaching 90) had told her that he would love to see her as a grown up, but in all probability he won’t. This got her wondering what age her Mummy will live until - she assumed we are all given a day of the dead in advance.

She was pretty happy with the explanation of actuarial tables - tables developed to calculate on average how long a certain group of people is going to live. I don’t think she understands that the number is just an estimation - no one can tell you when your personal day of the dead is coming up.

I looked myself up -- 76. That’s not very long. It was for women in the UK in general. I’ll just assume that doesn’t take into account that I don’t smoke and try to take care of myself.

A large part of the investing universe -- life insurance companies and pension funds, do care a great deal about when you are going to die. Actuarial tables have for over a century helped investors decide how long a person on average is going to be the beneficiary of a pension after retirement. The money you put into the pension pot was then invested accordingly.

How frightfully simple, except that’s not how it’s all working out.

day of dead.jpg

For people retired and retiring now, the actuarial tables were consulted in the 1970s and 80s. Fortunately for us, but unfortunately for the pension funds, advances in medical science means we are living longer as a species. The tables consulted back then were essentially “wrong”. The investing returns are supporting people for many more years than planned for.

So why talk about death and investing. Well, it explains the behavior and investing patterns of these mammoth funds. As they run out of money to pay out for us longer living human beings, they invest in riskier asset classes in order to make higher returns.