Detonation Sequence

I spent my twenties running small building companies – firstly the family business and ultimately my own. It’s a bit like spinning plates – only with plates that are miles apart. My days were spent flitting from site to site seeing that things were going more or less to plan and hopefully arriving before any plates actually smashed.

We were building a cottage on an infill site opposite the pub at Neatishead, a small, picturesque broadland village, and today we were due to concrete the footings. Access to the site was along a long drive that ran behind the neighbouring houses. The men had been finishing digging out the garage footings while they were waiting for the mixer truck to turn up. Concrete truck drivers are notoriously awkward and I’d timed my arrival to sort out any intransigence.

“Hey Richard – look at this! We’ve found two bombs!”

I trotted down the long drive after an excited brickie and sure enough there atop the spoil heap were two cylindrical metal objects that looked suspiciously like mortar shells. RAF Neatishead is only a stone’s throw up the road so it was not beyond the realms of possibility that someone had decided to bury some munitions.

“OK – leave them be for now. We’ll get the concrete in and I’ll call someone.”

The mixer truck turned up and labourer Micky proudly pointed to our two shells.

“I in’t goin nowhere near them – and if I can’t get shot of this concrete in an hour it’ll start goin’ orf and you’ll have to pay for it plus a dumping charge.”

“OK I’ll call a man”

I dialed 999 and told them our story. What I imagined would happen is they’d send a bloke in an escort van, he’d prod the bombs and either take them away in a carrier bag or put up a cordon of red and white tape. Either way, we would all be able to get on with our lives.

What they actually sent were two fire engines, an ambulance, any number of police cars and a mobile incident control vehicle. Within fifteen minutes, half the village was evacuated to the pub where the landlord set up a soup kitchen. At this point no-one had seen the bombs.

One of the fire engines parked across the end of the driveway and I was commanded to shelter behind the ‘appliance’ while we waited for the bomb disposal experts to arrive from, I thought he said, Coltishall, about ten miles away. At the time it was home to most of the nation’s Jaguar attack aircraft so it wasn’t unreasonable to assume there was someone there who knew what a bomb looked like.

An hour and a half later I realised I’d misheard and the sirens we could hear approaching were the bomb disposal team from Colchester. Their big green transit rocked into the village at speed behind two police bikes and reversed towards our ‘appliance’.

The back door of the van swung open silently and automatically. From the dark depths lumbered a bloke dressed not unlike Ned Kelly. His voice, distorted by the exertion required to both move in his kit and make himself heard through his heavy mask, was pretty close to Darth Vader– “Take me to the device…”

So we set off down the drive to inspect the bombs. He in his heavily padded suit and matching thick leather gauntlets, apron and helmet, dragging a high-pressure hose; me in cords and a thickish jumper. One of us was under-dressed and I had a sinking feeling it was me.

“They look like they could be chemical devices” he rasped as we squatted over the bombs. Gently, he started to wash the mud off the first one. One end looked as though it may have once had fins attached and as he hosed the grime away we started to see some lettering. “Ah great – if it’s a code number we should be able to identify exactly what we’ve got…”

He persevered and steadily the lettering became clearer until we could easily read the code W...H...I...T...B...R...E...A...D... The ‘bombs’ were CO2 cylinders from the pub.

Looking back, it is quite shocking how quickly things spiralled out of control. As it turned out, it didn’t really matter but there are times when events take over and the consequences are far more serious. A few years back, Radi and I met Nassim Taleb. His claim to fame is his book about Black Swan events, published close enough to the financial crisis to be regarded as prescient, in which he makes the case for the unpredictability of potentially catastrophic events and the need to build robustness to protect against them.

This robustness becomes particularly important for retirement income portfolios. While we’re saving money, a dramatic fall in markets can be seen as an opportunity to pick up assets cheaply and benefit in due course from their recovery. However, once we’re retired we run the risk of drawing down on depressed assets that then never have the opportunity to recover. This sequence of return risk can devastate portfolios and lead to vastly varying outcomes from similar investment strategies that happened to be started at different times.

For income portfolios, the sequence is arguably more important than the magnitude of the return. Managing sequence risk is key to ensuring a positive outcome.

There are several strategies that can be used. Conceptually, we like the idea of an investment cascade. Imagine your portfolio is split into three pots. The first pot holds two years’ worth of income and is invested in cash or near-cash. It will probably lose money in real terms but that is the price of security. In the second pot is the equivalent of three years’ income. This is invested in lower risk assets that will give a modest real return but have reasonably low volatility – typically corrections are small and recover within twelve to eighteen months. In the third pot goes all the rest, invested in higher risk assets that are likely to generate a meaningful real return.

When things are pottering along nicely, income is taken from the first pot, which is replenished from the second which in turn is topped up from the third. As there is real growth in the third pot it cascades rising income through the system. When the markets go pear-shaped, we know we have two years’ worth of secure income in the first pot and a further three years’ worth in the second pot. This means we can leave the third pot alone for up to five years to recover.

The way we actually apply this strategic concept is by using a reasonably granular diversified portfolio which has elements of all three pots. We manage sequence of return risk at each income event by looking at the relative weighting of the portfolio elements, comparing this with our target allocations and withdrawing from over-weighted assets. We think this is an effective means of managing sequence risk which builds on the long proven benefits of regular rebalancing. It’s not rocket science but it requires both discipline and robust systems to be effective.

Back at Neatishead, we looked at one another. Through the fog of his visor his eyes told me he was grinning.

“Can you give me a minute?”

“I think I better had…” the wheeze came back

I left him cleaning the second device and, studiously avoiding eye contact with anyone, made my way back up the drive, past the bomb disposal truck; past the fire engines; past the outside broadcast trucks from Look East and About Anglia; past the small group stood outside the pub supping pints; past the ambulance crew snoozing in their cab; past the coppers leaning on their car bonnets; past the two police motorcyclists looking over their machines; through the road block; past the queue of cars waiting to get into the village.

Then, figuring I’d already done my bit and that there were more than enough people there to sort things out, I jumped into my car and drove off without looking back.

Richard Ross June 2017

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