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Financial Planning

How to Be Smart (Not Brilliant) With Your Financial Planning, Part II

Follow these four money-management principles to cut through the clutter to focus on what's most important to your pocketbook and portfolio.

Just because common sense is often missing in the investment world doesn’t mean you have to follow like a lemming. Keep these principles always in mind:

Pay yourself first. For many investors, this is the best investment they can follow. Invest in your company’s 401(k) -- with a 50% employer match, you'll guarantee an instant 50% return. Investing in an unmatched 401(k) or IRA means Uncle Sam will subsidize your returns by allowing you to use tax money to earn more, and the federal government will share in the investment risk.

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You can’t buy yesterday’s returns. There is a reason all investment offerings are required to put in bold print “PAST PERFORMANCE IS NO GUARANTEE OF FUTURE PERFORMANCE.” So don't drive forward into your financial future looking in the rear-view mirror; i.e., make your investment decisions by evaluating what a firm or fund is likely to do in the future, not what it did yesterday. That’s why chasing Morningstar 5-Star funds is likely to be a losing proposition.

Don’t confuse data with knowledge. Financial “news” is mostly noise. Focus on fundamentals, not touts and speculative blather. Remember, there are a few simple rules for always picking a winning investment. Unfortunately, no one knows what they are.

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Follow the three Ps. When selecting investment managers (e.g., mutual funds), remember you are counting on the decisions of human beings, not firms. Pay close attention to their:

  • Philosophy – The investment world is filled with thousands of Tiger Woods, managing trillions of dollars. Not all of those managers can consistently win. Ask why you should give him or her some of your hard-earned money. You don’t want to hear “Because I buy low and sell high.” You want to hear a credible investment story that leaves you thinking, “Yes, I see how that might enable him to beat others over the long run.”
  • Process – It’s good to have a credible story, but that’s only a start. Next question is “How does the manager implement his or her story in the real world?” For example, what is their buy and sell discipline? How are the investment staff compensated? Are bonuses based on short-term or long-term performance?
  • People – Finally, you may be sold on the story and the process, but the key question is who are the people implementing it? Did they invent it or grow up with it? As Don Phillips of Morningstar so wisely said, “Do they have a passion for it?”

You can’t buy yesterday’s performance, but, if the manager has a good record and passes the three Ps, you stand a chance of getting some of that good performance in the future.

Harold Evensky, CFP is Chairman of Evensky & Katz, a fee-only wealth management firm and Professor of Practice at Texas Tech University. He holds degrees from Cornell University. Evensky served on the national IAFP Board, Chair of the TIAA-CREF Institute Advisor Board, Chair of the CFP Board of Governors and the International CFP Council. Evensky is author of The New Wealth Management and co-editor of The Investment Think Tank and Retirement Income Redesigned.

About the Author

Harold Evensky, CFP®

Chairman, Evensky and Katz

Harold Evensky, CFP® is Chairman of Evensky & Katz, a fee-only investment advisory firm and Professor of Practice in the Personal Financial Planning Department at Texas Tech University. Evensky served as Chair of the TIAA-CREF Institute Advisor Board, Chair of the CFP Board of Governors and the International CFP Council. He is on the advisory board of the Journal of Retirement Planning and is the Research Columnist for Journal of Financial Planning. Evensky is co-author of The New Wealth Management and co-editor of The Investment Think Tank and Retirement Income Redesigned. Mr. Evensky has received numerous awards over the years. The most recent is Investment Advisor Magazine, 2015 IA 35 for 35 recognizing the advisor advocates, investors, politicians and thought leaders have stood out over the past 35 years and will influence financial services for decades to come. Don Phillips of Morningstar called Mr. Evensky the dean of financial planning in America.

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