A Good Financial Planner Is Like This Year’s Hot Pitching Prospect

Originally in MoneyLike the Blue Jays’ Daniel Norris, a good financial planner is true to him- or herself.

“Stop asking questions, Maurer, and do what I tell you to do,” said the general agent for the Baltimore region of a major life insurance company.

“I made over a million dollars last year!”

“I buy a new Cadillac every two years — cash on the barrelhead.”

I was told how to dress: Dark suits, white shirts, and “power ties” that weren’t too busy. Light blue shirts were allowed on Wednesdays. Never wear sweat pants, even to the gym. Enter and exit the gym in a suit. Your hair should never touch your ears or your neck. Facial hair was strictly forbidden. Jeans, outlawed.

When you have a “big fish on the hook,”

‘The One-Page Financial Plan’—Simple, But Not Simplistic

Originally in ForbesSimple is hot, even fashionable. But in many cases, it’s for all the wrong reasons. Simple is easier to pitch, explain and sell, and therefore also easier to receive, understand and buy. But when simple devolves into simplistic, becoming a one-dimensional end instead of a user-friendly means, it’s no longer an advantage and may actually be doing damage. Not everything can be turned into a tagline, a rule of thumb or a short cut.

Therefore, when my colleague and New York Times contributor Carl Richards first asked me a couple years ago to think about what a financial plan might look like if it was constrained to a single page, I was skeptical. After all, I’d dedicated my life and work to helping people, primarily in their dealings with money, wholly through the written and spoken word. The fullness of that education seemed impossible to responsibly confine to a single page. Then I read Carl’s new book, The One-Page Financial Plan

At 208 pages, it may be a tad shorter than most personal finance books, but it’s obviously longer than one page. There is, however, a single page in it that I believe will help you understand why the book was written and how it could benefit you. On page 11, toward the end of the book’s introduction, Richards shares with us his family’s first attempt at an actual one-page financial plan.

The Dumbest (Most Important) Thing I’ve Ever Done

Originally in MoneyThe most important event in my life is one of which I was long ashamed.

I was an 18-year-old punk with a monumental chip on my shoulder. You know, the kind of kid certain of his indestructability, sure of his immunity from the dangers of self-destructive behavior.

At 2:00 a.m. on a random Wednesday morning in June 1994, after a long day and night of double-ended candle-burning, I set out for home in my Plymouth Horizon. At the time, my car was bedecked with stickers loudly displaying the names of late-60s rock bands. No shoes, no seatbelt, no problem.

Not even halfway home, I was awakened by the sound of rumble strips, just in time to fully experience my car leaving the road and careening over an embankment. After rolling down the hill, the vehicle settled on its wheels and I, surprisingly, landed in the driver’s seat. But all was not well.

Broken glass. My right leg was visibly fractured. I had hit the passenger seat so hard that it was dislodged from its mooring. Blood dripped on my white T-shirt.

Study Reveals Investing Is Hazardous To Your Health

Investing Hazard-01I don’t need to inform you that investing is dangerous business.  You already know in your gut what Joseph Engelberg and Christopher Parsons at U.C. San Diego found in their new study, that there is a noticeable correlation between market gyrations and our mental and physical health.

But when do you think the financial industry will get the point?

Shortly after I became a financial advisor, I was given a book to commit to memory.  It told me what my role in life would be: To make a very good living helping approximately 250 families stay in the stock market.

The text insisted that regardless of my client’s age or risk temperament, it would be in their best interest to be—and stay—in stocks, exclusively and forevermore.  I was the doctor; they were the patients.  I was the ark-builder; they were the—you get the point.

The book might even be right.


The Behavior Gap

My friend and New York Times contributor, Carl Richards, has been drawing a particular picture for years.  He’s struck by the research acknowledging the noticeable difference between investment rates of return and what investors actually make in the markets.  (Investors make materially less.)

Investors, it appears, allow emotions to drive their investing decisions.  A desire to make more money causes them to choose aggressive portfolios when times are good, but a gripping fear leads them to abandon the cause in down markets, missing the next upward cycle.

Investors buy high and sell low.

Well-meaning advisors, then, including the author of the book I referenced, have claimed their collective calling to be the buffer between their clients’ money and their emotions.  Unfortunately, it’s not working.

Maybe it’s because the intangible elements of life are so tightly woven into the tangible that we can’t optimally segregate them.

Maybe it’s because we’re not actually supposed to forcibly detach our emotions from our rational thought.

Maybe it’s because financial advisors and investing gurus should focus less on blowing the doors off the benchmark du jour and more on generating solid long-term gains from portfolios designed to be lived with.

Livable portfolios.

Portfolios designed to help clients stay in the game.

Portfolios designed to help clients (and advisors) avoid falling prey to the behavior gap.

Portfolios calibrated with a higher emphasis on capital preservation.

How much less money do you make, anyway, when you dial up a portfolio’s conservatism?

The Same Return With Less Risk

In his book, How to Think, Act, and Invest Like Warren Buffett, index-investing aficionado, Larry Swedroe, writes, “Instead of trying to increase returns without proportionally increasing risk, we can try to achieve the same return while lowering the risk of the portfolio.”

Using indexing data from 1975 to 2011, Swedroe begins with a standard 60/40 model—60% S&P 500 Index and 40% Five-Year Treasury Notes.  It has an annualized rate of return of 10.6% over that stretch and a standard deviation (a measurement of volatility—portfolio ups and downs.) of 10.8%.

Next, Swedroe begins stealing from the S&P 500 slice of the pie to diversify the portfolio with a bias toward small cap, value and international exposure (with a pinch of commodities).  The annualized return is boosted to 12.1% while the standard deviation rises proportionately less, to 11.2%.  (Remember, this is still a 60/40 portfolio with 40% in five-year treasuries.)

But here’s where Swedroe pulls the rabbit out of the hat:  He re-engineers the portfolio, flipping to a 40/60 portfolio, proportionately reducing all of his equity allocations and boosting his T-notes to 60% of the portfolio.  The net result is a portfolio with a 10.9% annualized rate of return—slightly higher than the original 60/40 portfolio—with a drastically lower standard deviation of 7.9%

Same return.  Less Risk.

This, of course, is all hypothetical.  This happened in the past, and for many reasons, it may not happen again.  These illustrations are not a recommended course of action for you or your advisor, but instead a demonstration that it is possible—and worth the effort—to work to this end.

Because we can’t keep hiding from the following logical thread:

1)   Volatile markets increase investor stress (even to the point of physical illness).

2)   Heightened investor stress leads to bad decisions—by both investors and advisors—that reduce investor returns.

3)   Market analysis suggests that portfolios can be engineered to maintain healthy long-term gains, while at the same time dramatically reducing the intensity of market gyrations.

How could we not, then, conclude that more investors would suffer less stress, thereby reducing (hopefully eliminating) their behavior gap, thereby allowing investors to hold on to more of their returns?

Isn’t that the point?

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Don’t Sell Yourself Short (Or Long)

Have you ever noticed how likely we are to share our financial success stories, yet how hesitant we become when sharing our financial failures?  Furthermore, have you picked-up on how we tend to attribute our success to our own brilliance but our failure to outside circumstances beyond our control?  If it goes right, we credit ourselves, but if it goes wrong, it’s not our fault.

This syndrome is so common, psychologists have given it a name—the Fundamental Attribution Error—and while we’re inherently averse to recognizing it in our own behavior, it’s the likely culprit in most dysfunction in the realm of personal finance.  But while we might have this innate self-centric orientation, there is something we can do to reconcile our perception with reality.  It’s a little practice called TRUTH.  It often hurts, but it always helps.

Truth has been around for several millennia, but we humans have a nasty habit of running from rather than toward it.  Embracing it is often humbling, but incredibly freeing.  A good friend of mine, Carl Richards, has become a model for truth-telling in the financial industry.  He’s a well-renowned and brilliantly creative advisor who expressed the truth of his own financial missteps to the world in a New York Times article entitled “How a Financial Pro Lost His House.”  He received almost universal support for coming clean, except, interestingly, from the financial planning community, where reviews were mixed and skewed toward condemnation rather than grace.  It saddened me, but it didn’t surprise me from an industry built more on perception than truth.  Fortunately, Carl is undeterred in sharing his story and inviting others to the truth party, to amazing effect.

So, what truth do you need to embrace?  Start small.  Admit that you weren’t actually a stock maven for buying Apple in the low hundreds—you just love your iPhone (or maybe it was an iPod back then).  Then, take a bigger step by acknowledging that you’re not a real estate mogul for buying your house a year before (or after) your now underwater neighbor; nor is he a financial imbecile.

Or has your fundamental attribution error suffered an inversion?  Maybe you’re positioned on the less green grass, suffering from one or more of the punishments doled out by the Great Recession.  You wonder, now months or years unemployed, whether you only ever had a job because you were lucky and are meant, instead, to be an employment reject.  “Maybe I just don’t have anything to offer society, even my family.”  You imagine your short-sale, foreclosure or bankruptcy as a lightning bolt punishment from the cloud-bound Overseer.  “What did I do to deserve this?”  These scripts that run through our conscious and subconscious minds are no more true, and are often a great deal more damaging than financial narcissism.

If it sounds like I may have experienced some of these errors in judgment personally, it’s because I have, and I don’t know anyone who has taken the time to engage in some honest self-analysis in this arena who has determined themselves immune, unscientifically proving the fundamental nature of this attribution error.  An interesting admonishment designed to help us live closer to the truth comes from Martha Beck in The Joy Diet, where she recommends we “create and absorb at least one moment of truth each day.”  Philosopher Dallas Willard suggests—“Earning is an attitude.  Effort is an action.”—and seems to find worth in the latter but little benefit to the former.  Would you, then, consider taking less credit for your successes and failures, instead applying that labor to the work of simply making better (financial) decisions?

Real Financial Planning

This is the last in a September series[i] that has featured guest posts from some of the most prolific bloggers and authors in the realm of money and life today.  If you missed any of them, I encourage you to revisit the wisdom Derek Sivers, Chris Guillebeau and J.D. Roth shared with us on TimMaurer.com.  And we complete this series of superstars with the person who I believe has taken the most unique approach to enhancing our understanding of personal finance—certainly the most artistic!

Carl Richards is a financial planner, blogger and the founder of the elusive Secret Society of Real Financial Planners.  Armed with a Sharpie and cardstock, Carl used his limited artistic skills to communicate some of the more complex and profound truths of financial planning and investing to clients with simple sketches.  His building body of work at www.BehaviorGap.com received more notice than he expected, and he was invited to become a regular contributor to the New York Times.  In January 2012, Portfolio/Penguin will publish Carl’s first book, Behavior Gap: Simple Ways to Stop Doing Dumb Things With Money.

Thankfully, I’ve also had the privilege of getting to know Carl personally, and through that relationship, I can certify beyond any doubt that Carl’s means, methods and message are not merely a smokescreen for attracting followers or selling books, but based on the foundational values upon which he grounds his life at work and home.  He’s been kind enough to share a sketch and a few words with us:

 It seems like making important financial decisions should be easy. After all, it’s just simple math, right? We’ve all been taught that one plus one equals two. Consequently, we often think that the process of making good financial decisions is as simple as plugging a few numbers into a spreadsheet or an online calculator. After hitting enter, we’ll have the answer.

The problem, of course, is that it doesn’t seem to be that simple. Making good financial decisions requires that we consider the implications of those decisions within the context of our lives. My life and your life do not look the same; therefore, they don’t fit into a spreadsheet.

What may be a good financial decision for me may be a disaster for you and vice versa. In my day job as a financial planner, I’m often asked by friends or people in the media, “What are you telling your clients to do now?” Recently I found myself becoming increasingly agitated by that question. Because of course the answer is, “It depends on the client you’re referring to,” because the answer will be as unique as their situation.

Real financial planning happens at the intersection of your life and your money. The problem of course is that this intersection is an emotional place. I think this is a challenge because most of us were raised with the idea that money, sex, and politics are not things that we discuss openly or in polite company.

Most of our parents felt like it was their job to protect us from the financial side of our families. We didn’t talk about money at the dinner table and chances are we didn’t talk about money at all. Our parents’ well-intentioned desire to protect their kids has left most of us ill-equipped to deal with the emotional issues that surround financial decisions and with the distinct belief that financial decisions can and should fit into a nice clean spreadsheet.

But they don’t. Dreams, fears, and our most cherished goals for our children don’t fit into a spreadsheet. Often those things are what financial decisions are really about. It’s not about finding the best investment; it’s about asking ourselves why we’re investing in the first place.

So in light of this fact, how do we go about making good financial decisions? It starts with taking the time to get really clear about where we’re trying to go and, maybe even more importantly, about why. So my suggestion is to stop watching Jim Cramer scream about nothing important and to put down the latest research report you received from the brokerage firm. Instead, take that time to have meaningful conversations with the people you love about money, your values as a family, and the kind of life you want to live together.

The subtitle of my first book was “The Intersection of Money and Life,” but I’m not sure I’ve seen anyone encapsulate it better.  Many thanks, Carl!

[i] If you missed the last couple weeks, you might not know that to celebrate the release of my new book, The Ultimate Financial Plan, co-authored with Jim Stovall, I’m featuring guest posts from some of the bloggers and writers who’ve most inspired me of late.