Retirement planning? Know what your goals are.
Retirement planning, or any other long-term investing, requires knowing what your ultimate goals are and having a porfolio strategy to match. Understanding how the portfolio completes the plan in the long-term supports improved retirement or other types of planning in the short term.
Geeta Chandran checks on the flowers in her garden at ShantiNiketan, a retirement community for people from India, in Tavares, Fla. DeYoe argues that retirement planning and other forms of long-term investing require never losing sight of your end goal.
John Raoux/AP/File
The single best piece of advice, which I received early in my career and have given hundreds if not thousands of times in the past 20 years, is a combination of planning and investment advice.
Before you invest you have to know what you are investing for.
鈥淢aking more money鈥� is not an investment goal.
鈥淏eating the market鈥� is not an investment goal.
鈥淏eating your neighbor, friend, or wife鈥檚 brother鈥� is not an investment goal.
Each of these is a setup.聽The things that you might do to accomplish each of these things, the things you might do to produce bigger and better returns in some short period of measurable time are often the very same behaviors that ultimately produce smaller and worse returns over your entire investing experience.
This is because the human mind is naturally a speculator (not that it is good at it, but that it is the natural tendency).聽Humans tend to equate price (what everyone seems to be willing to pay for an investment) with value (the intrinsic, even if only projected, real future cash flows available from the investment).聽By equating them, we are attracted to higher-priced investments, and we are afraid of lower priced investments.
Price is easy to determine.聽Value is hard.聽Price is exciting.聽Value is boring.聽Price is a conversation starter. Start talking about value and watch as eyes glaze over and people nod off. Add to these the fact that most investments are less tangible than the usual things we buy.聽When we go to the grocery store we know we are exchanging $1 for a can of tuna.聽If we can get the same can for 75 cents, we know that is a smarter choice.
It doesn鈥檛 work this way with investing.聽When we are investing and we are focused on 鈥渂eating the market,鈥� then we ultimately end up placing more and more of our money in higher and higher risk situations in order to do so.聽This is a process.聽When we start, we say to ourselves, 鈥淚 understand that risk and reward go together, but I don鈥檛 want too much risk so I will limit how much if this risky investment I will buy.鈥�
Time passes, that 鈥渞isky鈥� investment produces two times the performance over a different investment and we start to wonder if limiting our exposure was a mistake.聽More time passes, more relative underperformance under the bridge and we cave.聽Our risk discipline gives way to price chasing.聽Our lizard brain takes over.聽And if the risk investment goes up before our next statement, we get confirmation of our brilliance. We feel righteously justified and believe our good decision has created additional returns.
We will be wrong.聽We have ditched our risk discipline in favor of chasing returns, and we have added risk to create those extra returns.聽Ultimately, the further we go down this road, the closer we are to the next market problem and losing a third (plus or minus) of our capital. Please don鈥檛 take my word for it, look for yourself and you鈥檒l find that there have been 13 bear markets in the past 70 odd years that resulted in the loss of a third of our invested capital. I don鈥檛 think I need to explain how building your risk exposure as we approach a decline is really bad for your long-term portfolio. Yet, this is what the statistics tell us we do en masse.
On the flip side, when we hear about a great investment, and we do our research before we buy it for $100, then something unforeseeable happens and that investment falls to $75, well, let the second-guessing begin.聽Even if there was no fundamental change in the company and future cash flows haven鈥檛 changed, we get nervous and our natural tendency is to sell.聽If you repeat this often enough, you can lose an awful lot of money.
But if we have a plan to know what we are investing for, and we know that we have seven, 10 or more years until we need those future cash flows to begin, and we have perhaps 30 years or more (the average retirement) that we will need those cash flows. And we know, because we have planned using a cash flow analysis, that those future cash flows will be enough.聽And we understand, because our plan has been stress tested, that this kind of volatility is expected and completely natural.聽Then, we are able to short circuit this natural tendency to panic out of markets that are inevitably volatile and anxiety producing.
There鈥檚 nothing we can do about our human proclivities or about the volatility of markets, but knowing where we are going before we start, understanding the real trade-offs we have to make to get there, and understanding the likely outcomes on the path keeps us from making stupid, but very human, errors along the way.
Understanding how the portfolio completes the plan in the long-term supports improved behavior in the short term. If you don鈥檛 plan, then you tend to succumb to short-term volatility and reduce the long-term benefits of the very risk you are taking.
鈥�
Jonathan K. DeYoe, AIF and CPWA, is the founder and President of聽听颈苍 Berkeley, CA and blogs at The聽.聽 Financial Planning and Investment Advisory Services offered through DeYoe Wealth Management, Inc., A Registered Investment Advisor.聽 Securities offered through LPL Financial, Member聽/. 聽Learn more about Jonathan on聽
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations to any individual.聽 For your individual planning & investing needs, please see your investment professional.