It is not uncommon among laymen to assume that as a “finance guy” I invest people’s money, religiously monitor market performance, and react to movement on almost an hourly basis. Friends and family will occasionally shoot me a text when the market has had a really good day, and especially when the market has had a really bad day. This focus on the stock quote is what most of us have been trained to fixate on and incorrectly assume is the cornerstone of Financial Planning.
With few exceptions, I couldn’t care less how the market performed yesterday; to be honest, I don’t even know. That is not what I want to be focusing on, and that is certainly not what I want my clients to be focusing on.
The investment world is becoming ever more commoditized. Easy access to academic research and commentary, along with the rise of low-cost index funds is creating a much more uniform investment universe. Equal opportunity is everywhere; anyone can sit at their computer in their boxers and be a low cost investor. Most of the value and flair advisors can add on the investment side is gone, and 25 years down the road, before I’m even 50, there may be nothing left.
Clients work together with their Financial Planner to make strategic decisions that minimize their tax liability, invest their money in a fashion that is appropriate to their goals and risk tolerance, and help them manage all aspects of their financial lives. This means helping others achieve their life goals through proper management of financial resources. The “goal” is not necessarily to make as much money as humanly possible by maximizing returns, but rather to take an appropriate, pragmatic amount of risk that will generate consistent returns over a long period of time. What ties the whole thing together is the ability of the Planner to manage financial behavior, which often involves helping clients take a long-term view on investing and their financial lives.
For some, a “long period of time” is the endless stretch between breakfast and lunch. When it comes to investing, I’m talking a much longer stretch, as in a substantial percentage of your lifetime. This of course requires an enormous amount of discipline and patience, which is not the popular attitude when people on Twitter and at the barbershop are yelling things at you about SalesForce stock. People are trained to think reactively and quickly: the stock went down, how can I solve this problem...how can I minimize my pain?
This is human nature, and we have been trained to favor reaction over inaction. Why is this the case? On the savannah action was preferable to inaction. If there was a rustle in the bush there was two possibilities: 1) It was a tiger or 2) It was the wind. If you reacted, you may have been running from the wind 90% of the time, but at least the 10% of the time it was a tiger you could get away. If you did nothing, you may have avoided looking foolish the 90% of the time it was the wind but the 10% of the time it was a tiger you were eaten. Point being, action was preferable, and over time those with the quickest reaction survived as one only had to out-react the slowest. However, what worked on the savannah does not work in the markets. On the contrary, when turmoil is present doing nothing is often the best advice.
When a tree is planted, you aren’t checking every day to see if the tree has grown. If you did you would become frustrated, diagnose the tree as a dud, and chop it down. The same behavior is seen in the world of investing. A better approach is to plant the tree, make sure it has all the necessary nutrients to grow and then forget about it…And of course prune it quarterly through the process of rebalancing.
The focus that investing has received since the genesis of the stock market has created a constant uphill battle for true Financial Planners. When most think of finance, their brains instantly go to the sexy image of stock picks and owning a yacht. Furthermore, the media fuels this image by constantly shoving market data and speculation down our throats. Individuals ask questions about returns and “hot stock picks” rather than asking for their estate plan to be reviewed, or ask how many months of cash reserves they should have as an emergency fund.
Anyone who is willing to give you investment advice prior to reviewing your total financial picture is suspect in my opinion. A lot of considerations take precedent to sinking large sums of money into a brokerage account. Do you have an emergency fund? Are you properly insured? Does your budget need to be addressed? How are all of your other investments allocated? These are just a few of the many topics that should be addressed before investment decisions are made.
I define myself as a planner, not an investor. What to invest in, and the markets current performance, often have little to do with helping people make smart decisions about money.