Twenty years ago, when I was new to working in the world of wealth management, I started working with two wonderful new (married) clients—James and Sue. James was a well-respected engineer for a large, well-respected organization and Sue had stopped working outside the home about ten years earlier. Due to his position, James was very well compensated, yet the couple lived pretty frugally. They were in their early sixties and lived on about a third of their income. They were big savers.
By the time they became clients, they had been living this way for nearly forty years and had a very nice nest egg set aside. I did what I had been trained to do by the large brokerage firm I worked for: I did a basic risk assessment, asked a couple of questions about what they wanted in retirement, and learned James wanted to retire in four years. From there, I started investing their portfolio.
A few months later, I received a phone call from Sue asking if I would speak to James. The transmission had gone out on the fifteen year old Chrysler New Yorker he drove, and she wanted me to encourage him to buy a new vehicle. He had always wanted a truck, but recent market volatility had him worried. He was afraid that if he bought a truck, it might mess up their retirement plans. The truth is, had their accounts been solely in cash, they would have had enough to live on for over 150 years. I told him he could buy a truck.
The following month, James and Sue were in my office for a review and at the conclusion, Sue told me they had bought a truck two days before and asked if I wanted to see it. Absolutely!! As a Texas guy who would rather be hunting, fishing, or golfing than doing just about anything, I love a nice truck. We walked outside and what I saw left me speechless. There it was! A single cab…..Ford…….Ranger!......with cloth seats. In the end, fear had kept James from actually buying the truck he had dreamed of for years.
Yogi Berra is credited with saying “If you don’t know where you are going, you might wind up someplace else.” For James and Sue, the absence of a comprehensive financial plan meant they didn’t really know their current position or where they wanted to go. That day, I decided to make providing comprehensive financial plans a priority.
In these volatile markets, irrational decisions are easy to make. (Have you tried buying toilet paper in the past few days?) Our lives and the financial markets are filled with uncertainty and fear (if not panic) as the coronavirus impacts literally every area of our normal lives. It is hard not to look at investment accounts multiple times a day and even harder to not stress over what is happening in those accounts. That stress is exactly why it is vital to have a truly comprehensive financial plan and strategy.
A 2018 Schwab study found that only around 25% of American adults have a written financial plan [1]. Those with a plan exhibited more positive investing and saving behavior while also more effectively managing debt. And the American Psychological Association says having a plan is one of the top ways to deal with financial stress [2].
There are many reasons why having a comprehensive plan can help with financial stress. The primary reason is that it gives both clear direction and also a clear standard to measure against when looking at market performance. Too often, the natural instinct is to compare the market or personal account balances at the highest point to current levels and let the amount of the change determine our state of mind. When those numbers decline significantly, especially in a short time period, stress and panic can set in.
Having a financial plan allows you to stress test portfolio performance against your actual goals rather than against current market trends. First, a good plan reminds us of the element of time involved in reaching goals. It reminds us that we are playing a long game and that market variation is accounted for in developing a portfolio and setting a time horizon to reach those goals. Secondly, it reminds us of what the goals really are. Instead of measuring against the impossible goal of always buying at the bottom and selling at the top in order to make every possible dollar available, we measure against what is actually needed in performance to keep on track to reach the end goal.
In short, a comprehensive financial plan reduces stress by allowing us to not think myopically. In times like these, not having a near-sighted view of your finances means there is just one less thing to stress about. The kids are home from school, you’re working from home amidst the chaos, you have to cook every meal because everything is shut down, and you’re rationing toilet paper…..there is plenty to stress without focusing on the markets. And if you have a great plan, you don’t have to keep the business news on in the background. You can put on a movie for the kids and work on the things you actually can affect.
Sources:
[1] https://pressroom.aboutschwab.com/press-release/schwab-investor-services-news/most-americans-dont-have-financial-plan-and-many-think-t
[2] https://www.apa.org/helpcenter/holiday-stress-finances
[3] https://www.apa.org/helpcenter/economic-stress
