By: Ryan P. Dolan
“I went 100% to cash in my retirement accounts on Tuesday.”
This statement, apropos of nothing, came from a friend recently at a party.
“Oh,” I stammered, unsure what to say “...why?”
His response essentially boiled down to a combination of factors: “the market is too high,” “coronavirus,” and the “election.” He seemed confident in his decision as the market subsequently fell 2% the day after he sold.
“OK, but when do you plan on retiring?” I asked, trying to reorient the conversation.
“God I don’t know” he said huffily, mildly irritated by my seque. “In my early 60s ideally, but the way we spend money, it’s probably going to be later.”
This put his retirement at least 20 years away.
“Do you have a rough idea of what kind of income you’re going to need annually in retirement? Said another way, do you know how much money you are going to need to fund your lifestyle in retirement?
Awkward silence.
I highlight this conversation because it's reminiscent of many such conversations I’ve had over the years. My friend was exhibiting a problem which bedevils so many individual investors. Simply put, he was making critical investment decisions in a vacuum. Here he was, making a massive change to his retirement-focused investments without first defining what his retirement would look like, and what his needs will be. When you don’t begin with a picture of your destination, how on earth can you craft a plan and the requisite behaviors to get there? He was providing answers and opinions to questions that are largely unknowable. We can’t know, with any reliability or predictability, whether the market is in fact too high, or if a pandemic will spread globally, or if an election will affect markets.
However, the core questions that must be answered ARE knowable. What does your ideal retirement-yours not anyone else’s-look like? Do you want to retire in the first place? What does a safe and secure retirement look like to you? What kind of life expectancy does your family have? Do you want to leave a legacy to your children or to charities? What do you need in annual income in retirement? What amount of investment assets do you need to throw off that income? What do you have in retirement assets today? It’s a process getting to your vision of your goal. You don’t come in and define it in a meeting. You start gradually and frame the need broadly. Over time, this vision is refined until it is uniquely yours.
Having a sound, tailored and adaptive financial plan is a necessary first step on the road to sound investing. Necessary, but in my experience, not sufficient. Even the best plans can be hijacked by a litany of common behavioral investment mistakes. In my view, the plan must be augmented with a process that works to keep the client focused on core principles, long-term goals, aware of common behavioral mistakes, and accountable to the plan.
While there are common patterns of investor mistakes, each client has their own unique strengths and weaknesses. It behooves a client to work with an advisor who will work to understand these. Some clients are hyper sensitive to short-term market volatility, others are fairly immune. Some are prone to large, emotional swings in their investment temperament, others are all calm equanimity. Some people are doom and gloom, and others see nothing but optimistic, best case scenarios. My role is to continually reinforce sound investment principles and tailor my guidance to each client’s investment and behavioral needs. Most importantly, my role is to build enough trust and credibility for the handful of times in a client’s investment lifetime when they are being lured into making a profoundly wrong decision. Given enough time, markets will work to find our unique weaknesses and try and expose them.
Working to become a better investor is a never-ending journey. I thought I’d leave you with a couple general investment thoughts. I’ve always loved the poem “If’ by Rudyard Kipling. Like all sublime writing, you glean fresh insights with each reading. While the poem is deeply resonant for life in general, it certainly can apply to investing.
“If you can keep your head when all about you are losing theirs…”
Periodically, markets become manic and highly emotional. The market’s siren song occasionally becomes so strong, the impulse toward greed or fear so resonant, that it seems nobody is capable of resisting its emotional vortex. In these moments, having a calm and experienced advisor who can reorient you on your goals, reframe the investment landscape, and push you toward better decision-making is so important. At a time when market enthusiasm and bullish prognostications are thick on the ground, working to keep level-headed and rational is particularly important.
“If you can wait and not be tired by waiting…”
Investing is a long-term game, and yet virtually everything you hear about investing is short-term oriented. The media, Wall Street, and our culture celebrates the now. An advisor needs to work to constantly reinforce patience, discipline and delayed gratification to his clients. The more you can get a client focused on long-term decision making, and the near-term behaviors needed, the better their results will be. All good things take time.
“If you can meet with Triumph and Disaster and treat those two imposter just the same…”
I love this line, and yet it is a constant battle to implement-personally and with clients. In life, and in planning and investing, the unpredictable happens. Life and markets are cyclical, and dole out their fair share of Triumph and Disaster to all of us. Building emotional ballast in clients is hugely important. Most people’s natural tendency is to magnify the impact of what they are currently going through, and extrapolate it into the future. I strive constantly to get clients to build their capacity to deal with unforeseen financial outcomes, while building a rational mindset.
To summarize:
Don’t make investing decisions before you’ve defined what the money will be for. Trouble awaits down that road. Always begin with the end in mind.
Don’t do it alone. The odds of achieving long-term financial and investment success are increased dramatically when you have a rational, calm, and seasoned copilot by your side. Don’t self-sabotage your investing.