Financial Planning

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

Here’s a blueprint for prosperity that relies on common sense.

When it comes to wealth, everyone would love to find that pot of gold at the end of the rainbow. But using that wish as a guiding principle in your investment planning is likely to ensure failure; so, what to do? Simple -- be smart, not brilliant and follow a few common sense rules.

General Principles Remember you’re investing for your future, not today.

  • Don’t pay attention to the talking heads on Wall Street TV.
  • Don’t confuse a bull market with brilliance and a bear market with Armageddon.
  • Develop an allocation policy that’s appropriate for your return needs and risk tolerance -- AND STICK TO IT!
  • To help you stick to it, insure you have adequate cash reserves to carry you through a bear market. Research suggests about one year's worth of your supplemental cash flow needs is appropriate.
  • To keep you focused on long-term investing, remember this mantra – “5 Years, 5 Years, 5 Years.” That is, do not make any investment unless you have every confidence that you will have a five-year window before having to sell.
  • Sometimes the best investments are the ones you don’t make.

Risk Risk is scary, but it’s only a four-letter word. Focus on managing it, not avoiding it.

  • Diversify. For individual stock or bond positions, don’t hold more than 10% in any one position (less is better). Then, diversify asset classes; e.g., bonds and stocks. If you don’t have a clue where to start, consider 40% bonds and 60% stock.
  • Rebalance. Good investing is not Buy and Forget -- but rather Buy and Manage. For example, let’s say you set a “rebalance parameter” of 10%. Your portfolio starts off 40% bonds and 60% stock. Then, the market drops so that when you check your portfolio you now have 55% bonds and 45% stock. It’s time to rebalance; i.e., sell bonds and buy stocks. The good news is that over time you’ll be doing what everyone says they want to do – sell high and buy low. Just remember, when you're doing it, it’s painful because you're selling what did well and buying what did poorly.
  • Don’t confuse certainty and safety. Losing money in a bear market is the risk most investors think about. But just as risky is losing your standard of living because your supposedly “safe” investments are in cash and CDs, and they didn’t generate enough return to maintain your standard of living.
  • Don’t confuse your risk capacity with your risk tolerance. You may have the financial resources to absorb losses without impacting your ability to achieve your goals, but emotionally you may not be willing to maintain your market exposure in a serious bear market. Liquidating in the midst of a bear market is one of the most serious mistakes an investor can make, as there is no opportunity for recovery.

Returns Invest for the long-term quality of your lifestyle, not bragging rights.

  • What gets measured, gets managed. That means don’t just stop with selecting the best investments; continually monitor the results. And, don’t forget to measure the bite of taxes and fees, as well as the risk involved.
  • When you measure, use an appropriate benchmark. It’s all too common for a manager to brag that they beat the S&P 500. Problem is that they never owned an S&P 500 stock. Instead, they may have invested in small-company stocks, international stocks, or some other sector or style. Find out what sand box they’re playing in, and compare their performance to an exchange-traded fund (ETF) that invest in the same type of securities.

Follow these rules, and you’ll be off to a great start. More to come in future articles.

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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