A Plan for 2012 That You'll Actually Follow

(from Carl Richard's New York Times' Bucks blog, 12/26/2011 - click here for the original post. Carl is a Certified Financial Planner in Park City, Utah. His sketches are archived on the Bucks blog and on his personal Web site, www.BehaviorGap.com.)  His new book The Behavior Gap, will be out in January.

For 2012, I have a challenge for you: make financial decisions on purpose. Too much of what we do is based on habits and assumptions instead of a thoughtful plan. During the next year, see what happens when you do these three things:

1) Define your current reality. I used to think this was the easy part. Turns out I was wrong. Most people don’t know where they actually stand financially.

After the last few years, it’s tough to face the reality of our situations. Even if you have a sense that things have gone well for you financially, building a personal balance sheet doesn’t rank very high on the fun meter, but it has to be done. It makes it hard to reach any goal if you have no idea where you are starting from.

2) Set some goals. This step hangs people up because often we have no idea what we will be doing in five days, let alone five years. Still, it’s really hard to get somewhere if you don’t know where you’re going.

Let go of the need for precision. These are guesses, so make the best guess you can and move on. How important is paying for college for your child or children (or grandchildren)? Define it a bit. How much will it cost, what can you save, when will it happen?

Be honest. Be realistic. Of course part of this process will involve making some assumption about rates of return you will earn. Be conservative and focus instead on having realistic goals and saving more. If you can’t save more, maybe spend some time trying to earn a bit on the side.

3) Commit to course corrections. Plan on them, in fact. Break down what you have to do into quarterly action steps, and then revisit the plan every three months.

If you are off course, make changes while you’re only a little bit off. If you leave Los Angeles on a flight to New York City and you’re a half inch off course, it’s much easier to adjust when you are over Nevada than it will be a few miles outside of Miami.

Planning for a better financial future is an continuing process, not a single event. It is also short-term boring but long-term exciting.

In 2012, commit to doing small, simple things consistently and over time. It will be the opposite of what we’ll hear in the news every day about making enormous changes, so part of the challenge will be to ignore the constant call for rash actions and sweeping reform.

Let’s make 2012 about subtle, small actions so we can make progress towards our goals over a long period of time.

Embracing Simplicity

Around the holidays, I find myself overcomplicating things.  From trying to find the perfect gifts and decorating the house just right, to making a spectacular meal consisting of recipes I’ve never tried.  Many times, this just ends up causing anxiety, and the end does not feel like it justifies the means.  Not because I have ungrateful friends or family, but because what is more important to them is the time spent together, not the hours spent preparing a “Martha Stewart” moment.

The irony is that I am not practicing what I preach.  I often tell clients that the less complicated an investment, often makes it better.  This usually means lower fees, which translates into better performance. 

It’s also true for the way people save.  It can be very easy for someone to reach their financial goals by creating a plan, reviewing it at least annually or as their life changes, and simply letting the power of compound interest do the rest.  Unfortunately, we live in a world where more complicated has become synonymous with more appealing.  It’s easy to get seduced by the notion that more time and effort will always result in a better outcome.

All you have to do is look at our government to see how well this works.  Most legislation that is passed is written on thousands of pages.  Chip recently attended a Dimensional (DFA) conference where one of the speakers suggested each government agency cut their annual budget by x% each year.  He mentioned this in his last blog post, FiscalStuff.    This simple move could meaningfully cut our country’s deficit with minimal pain shared by everyone.

So, as you gather with your family over the holidays, and talk ultimately turns to New Year’s resolutions, maybe yours could be to embrace simplicity.   This could be anything from setting up your 401(k) contributions to increase by 1% each year, to changing one dietary habit a month if you’re trying to lose weight,  to just being cognizant of the way we allow complication to sneak into our lives.  As with most things, once we create a plan of attack, our goals become easier to reach.

Enjoy the holidays!      

Christine L. Carleton, CFP®
clcarleton@taaginc.com
http://www.taaginc.com/

Resolutions - Part I

Brad Steinman, Director of the Canadian arm of Dimensional Fund Advisors, offered up 10 important investment resolutions to start off the new year. Brad’s goal was to warn investors away from “ill-advised practices that are detrimental to their wealth” and hopes that “a set of New Year’s Investment resolutions, along with an advisor capable of helping investors adhere to them, will lead to a more prosperous future.”

Rather than rattle them off in what would be a rather lengthy blog post, we’ve decided to take a few resolutions at a time and provide some commentary on each periodically over the next several weeks.

Resolution #1: I will not confuse entertainment with advice. I will acknowledge that the financial media is in the entertainment business and their message can compromise my long-term focus and discipline, leading me to make poor investment decisions. If necessary I will turn off CNBC and turn on ESPN.

TAAG Thoughts: This is a topic we’ve covered at length in this space. There’s no question that what once passed as tabloid journalism has become “the news” across all fronts. Be it Jim Cramer, Brett Favre or the Kardashians, it can be difficult to differentiate between the evening news, CNBC and TMZ. The line between entertainment and information has been severely blurred if not erased altogether. We fully agree with Mr. Steinman that the best media to listen to when it comes to long term investment strategies is no media whatsoever.

Resolution #2: I will stop searching for tomorrow's star money manager, as there are no gurus. Capitalism will be my guru because with capitalism there is a positive expected return on capital, and it is there for the taking. And for me to succeed, someone else doesn't have to fail.

TAAG Thoughts: This touches on several of our firms core values, most notably the notion that gurus, much like the media, are to be ignored. Those who “get it right” are impossible to identify in advance, rarely repeat their success and the actual return investors receive in chasing these soothsayers after the fact pales in comparison to the returns as advertised. For more on the obstacles and dangers related to this manner of investing, see Dan Solin’s blog from last year.

The thoughts on capitalism and the long term expected return on capital ring true as well. In the long term, the only bet an investor needs to place is that the companies of the world will continue to grow. There will be lots of bumps in the road, some wild successes and some companies that cease to be, but, in the long run, the world will continue to develop new innovations and grow its collective balance sheet as it always has. You can participate in that growth by holding a globally diversified portfolio that seeks not to beat or outthink a market that, in the short term, will almost always disappoint.

These resolutions may seem like simple ideas, but we see time and time again that it is so easy to get caught up in the media hype or the promise of something out there that will allow investors to hit that home run without taking the required risk. Neither is an accurate depiction of real life or where our expectations should lie when it comes to our portfolios.
We hope you enjoy these and the other resolutions to come.

Chip Workman, CFP®
cworkman@taaginc.com
www.taaginc.com