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The Big Secret

There is no bigger secret than planning!  People do not plan to fail, they fail to plan.  The process of financial planning or investment policy development is a challenge.  I am letting The Big Secret out of the bag!

Most people plan in reverse: they plan after the fact.  Bad.  All planning should be done with the goal in mind.  In the context of financial and investment planning, however, the financial planning is mostly carried out by oversimplifying the process, consequently the investment policy development focuses on purely beating the market – the wrong goal.  Giving prudent financial and investment planning a chance is forward thinking, rational and improves the conditions for attaining peace of mind.

By omitting and disregarding the necessary details from financial planning, the planning becomes watered down to the point of being useless.  Financial planning is not that hard to do; what is hard is being specific, realistic, timely, analytic and objective.  Generalities do not cut it.  In truth, you cannot take generalities to the bank.  Financial planning creates the ways and means to eat 43,800 meals (three meals a day) for two people from age 66 to 86.  Oh, and at ‘X’ per day for food = this is what you need to have in the ‘bank’.

Setting and implementing investment objectives is difficult.  The constant drum beat, the static about market returns, deafens us all to the truth that trying to beat the market is a fool’s game.  Add to this the emotions around any investment decision and you have a volatile mixture set to explode in your face like a high school Chemistry 101 experiment gone bad.

“The truly important, but not very difficult task, would be to establish sensible investment policies with which to achieve realistic and specified investment objectives.  An appropriate change of even quite modest magnitude in the basic asset allocation decision, for example, can capture an improvement in total return that would be significantly greater  than the elusive increment sought in “beat the market” syndrome.”  Charles Ellis, Setting Investment Objectives, in Investment Policy.

This paragraph nails the point that 93% of the variability of investment returns is a function of purposeful asset allocation.  Given that purposeful asset allocation is created by Investment Policy development, The Second Big Secret is setting a realistic time horizon for your investments.  It is the single most important factor that separates the appropriate investment objective of one portfolio from the appropriate objective of another portfolio.  Specifically, how long can you and will you commit the portfolio, evaluate investment results and investment objectives?

What both asset allocation and the specification of time horizon do is control risk, not maximize returns.  This is what all good investment efforts should do.  The conventional efforts of boosting returns are costly.  What do you think all the scandals are about??  They are about trying to increase returns without risk, as if!

So repeat after me … I will reduce risk by resolving to plan my financial and investment life.  I will seek to control risk by purposeful asset allocation.  I will be realistic in the selection of my portfolio’s time horizons.  Attempting to singularly beat the market leads to underachievement.

Planning gives all of us a fair shot at the gold ring; a nest that you built.  Planning enables you to control your own destiny freely.


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Check the background of this financial professional on FINRA's BrokerCheck