In 1891, Carl Elsener, a master cutler in the Swiss village of Ibach, invented a most innovative object – The “SWISS ARMY KNIFE”.
You would be hard pressed to find someone who does not know about these. The New York Museum of Modern Art and the State Museum for Applied Art in Munich have both selected it for their collection of design excellence. Despite its excellence, the SWISS ARMY KNIFE has an obvious flaw. It is good at doing 33 things, but it is not the best at doing any one of them.
A Swiss Army Knife is most valuable when you do not know exactly what problem you will face.
In cases where you do know what problem to solve, single purpose tools will always solve the problem better. A green Robertson screwdriver is an extremely poor pair of scissors but it is peerless at driving #6 Robertson screws.
People need to address this specialized versus multipurpose decision when looking at achieving financial goals.
You know some problems in advance. The clear ones include the need for income in the event of illness or injury, the need for liquidity, the need to resolve debt or tax obligations on death. You should use special purpose tools to resolve these. If you need income, buy an income tool. If you need capital, buy a capital tool. You will always get better value.
If you know the problem, then “Swiss-Army-Knife-Like” financial tools provide weaker answers. No mutual fund can guarantee retirement income as well as an annuity. Similarly, no annuity can provide accessible capital at some future undetermined time as well as a mutual fund.
Nothing is cheaper than using life insurance to pay the inevitable estate costs and income taxes.
Special purpose tools solve specific problems most efficiently. When the problem or opportunity has not yet become clear or may change in the future, a multipurpose tool will be advantageous. However, watch for changes that will render it less efficient.
If you can clearly define the problem or opportunity, you should find a specific financial tool to resolve it.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. firstname.lastname@example.org