Financial Planning Friday: Oh Behave, Baby!

May 19th, 2017 by Anchor Bay Capital's Investment Team

As I was sitting in the bleachers watching my son’s baseball game last weekend, I overheard a conversation that went something like this…”This stock market, how much higher can this thing go? I think the whole thing is going to come crashing down with everything that is going on.” The conversation was between a man that appeared to be in his retirement years and his adult son. I could hear the frustration in the man’s voice as I listened, and I thought about how much his sentiment echoed similar conversations that I have experienced recently.

So, what do you do about a stock market that recently passed the eight year mark of a bull market? A written financial plan can be your guide to the answer.  Here are a few things to consider:

Write down your asset allocation strategy:

An essential part of your financial plan is having a written investment strategy.  The foundation of your strategy should define the optimal allocation of your money among broad asset classes that will help you reach your goals.  This means that your approach to investing should be driven by your goals.  What do you want? How much do you need to achieve it? How long do you have to get there?  Once your goals are determined, a simple strategic way to allocate your money is to divide it up between stocks, bonds, and cash.  The key is your expectations!

• Cash for goals within the next two years
• Bonds for goals in two to five years
• Stocks for goals beyond five years.

Maintaining a long term perspective on stocks can help you put a market loss in perspective.  Just keep in mind that major goals like retirement are ongoing.  This means that you do not plan up to retirement, you need to plan through retirement with a portion of your portfolio invested for the long term.

Check your diversification:

After you have written down your asset allocation, the next thing to keep in mind is diversification.  The old, “Don’t put all your eggs in one basket” saying.  Think of it this way, over the long term you want to capture the growth of the market.  In his book, “Simple Wealth, Inevitable Wealth,” the author, Nick Murray says, “the value of the thriving companies which shape an economy is one of permanent advance punctuated by temporary decline…the advance is permanent, the declines are temporary.” [1]  While the market is always going to advance, particular companies may not.  Rather than bet your portfolio on a few stock picks, you are better off capturing the “permanent advance” of stocks in general.  I recommend holding a core of stocks that represent the entire market.  Outside of this core, is where you can invest with a specialty if you desire.

The most important part is how you behave:

Early in my career, I was taught that the seven deadly sins of investing were as follows:

1. Emotion
2. Disorganization
3. Impatience
4. Myopia (near-sightedness)
5. Greed
6. Arrogance
7. Cowardice

All of these “sins” lead investors to making bad decisions.  However avoiding these sins often requires us to get some help.  This may be the most significant reason to work with an advisor that you trust.  In fact, a Vanguard study stated that “the discipline and guidance that an advisor might provide through behavioral coaching could be the largest potential value-add.” [2]  Vanguard concluded that behavioral coaching can add between 1% and 2% to your net return.

The lesson is that we need to get out of our heads and have a system for keeping us on track.  This brings me back to the written financial plan that I mentioned before.  We write down a strategy so that we can revisit it often.  So that we can systematically make smart decisions with our money.  Especially in times like these, when some of us wonder, “What should I do now?” Your financial plan will tell you.

[1] Simple Wealth, Inevitable Wealth, Fifth Edition; Nick Murray; copyright 2013; pg. 69

[2] Putting a value on your value: Quantifying Vanguard Advisor’s Alpha; September 2016; pg. 16