Great Investors Work from a Plan

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“Failing to Plan is Planning to Fail.”
– Anonymous

In last month’s article, we focused on “Keeping Things Simple” as one of the great qualities to adopt for anyone who wants to become a great investor. This month we focus on a similar, but slightly different quality…Great Investors Work from a Plan.

What Really Matters

Most people believe what the media, pop culture and conventional wisdom tell us, that the ultimate aim of personal investing is to exercise superior investment timing and selection so that one might “outperform the market”.

Sending your kids to college is a financial goal. Supporting your parents in their old age is a financial goal. Accumulating enough money to retire on comfortably is a financial goal. Causing your income to outlive you instead of the other way around is a financial goal. Endowing a church or charity you love is a financial goal. Beating an arbitrary investment index is not a financial goal.

Too many investors come to this realization too late to save themselves, that the return earned by their portfolio was not the key determinant of their real life financial outcome. What matters is the presence or absence of a written, date-specific, dollar specific accumulation and distribution plan, funded with the appropriate asset classes.

We at Concentus have a core belief that the only appropriate medium for an investment portfolio is a written, date and dollar specific financial plan. An investment portfolio is never an end to itself, it is only the means to the goals of a written plan. Long term investing success always stems from acting on a plan, as opposed to reacting to markets – we prefer a “Plan” to a “Market Outlook” every time.

Failing to Plan…

It has been said that failing to plan is planning to fail, and this saying certainly holds true when it comes to your wealth. People who sit down and design a date-specific and dollar-specific written wealth plan have a greater chance of building and preserving wealth than those who don’t. Long-term investment success comes from acting on a plan, while failure is typically precipitated by reacting to the markets. For some reason many people can’t accept this, and discount the value of planning – very few people actually have a specific, written financial plan but instead continue to use “outperforming the market” as their benchmark for success.

Planning is critical for two very important reasons…

First, any plan for funding a real life financial goal, such as retirement, must first begin with a realistic and logical calculation for how much capital will be required to fund that goal. In the case of retirement, we first must understand how much we wish to spend each year in our retirement, and then conduct the proper calculation for how much we need to save on a regular basis, regardless of whether our investments “outperform the market”.

Consider that I might use superior portfolio selection to “Outperform” my neighbor by a full 3% per year in the 20 years to retirement – a huge margin. However, if neither of us took the time to properly calculate how much we needed to contribute to our investment plan over time, such that he runs out of money when he is 79, and I don’t run out of money until I am 84, it won’t matter much when we are both sitting on a park bench at 86, without two nickels to rub together between us. I will receive no “gold star” for my analytical skills. Those who believe in the primacy of “outperforming the market” don’t figure this out until it is too late to sit down and write a financial plan with the proper calculations for how much they needed to save for retirement, or how much they should spend in retirement.

Second, once we have done the necessary calculations described above, the planning process requires that we develop a specific policy for investing our capital in the classes of investments which have historically provided the returns which will be sufficient to achieve the goals of our plan. Then, we must stick with our plan, when you are tempted not to, because of the fads, fears and emotional volatility of the investment markets which can throw you off course.

This last step is indeed very simple: in order to build and preserve your wealth over time, one must remain consistently disciplined to continue acting on their plan, and not reacting to the markets. While this is simple, it is not easy. Human beings are emotionally hard wired in a way that tempts us to abandon our plan in a panic when market corrections or bear markets arise, or in a fit of euphoria when a “new era” bull market entices us to throw caution to the wind and bet our entire retirement on stocks.

The presence of a written plan dramatically increases our ability to maintain such discipline, and to remain proactive about our plan as opposed to reactive. There is great psychological power in “putting it in writing”, and we are much more likely to behave in a disciplined way when we are following written rules we have created for ourselves.

The Folly of “Outperforming”

What is the possible cost of constantly reacting to markets, instead of patiently following an investment plan? Consider an example:

According to Kiplinger’s, the Parnassus Endeavor Fund was the best performing equity fund of the last 10 years from 12/31/2006 through 12/31/16. Its annual performance track record for the last 10 years is as follows below. As this analysis shows, this fund delivered a decisive and significant performance advantage compared to the S&P 500, and any investor would have been lucky to find this “diamond in the rough”:

Robbie Reactive is an investor who was raised to believe in the conventional wisdom that “Outperformance” is the key factor to his long-term investment success.  He spent years of study to become an expert at mutual fund research and due diligence, and he spent a ton of time back in 2006 to find the best fund in the land.  Thanks to his sharp skills at mutual fund research, he was somehow able to spot the potential of the Parnassus fund, and decided to use the Parnassus fund as the cornerstone of his retirement accumulation plan.  He decided that he would buy as much of this fund as he could, whenever the market looked good.

Penny Planner is an investor who believes in planning. Instead of spending all the time Robbie did on mutual fund selection, Penny spent all of her time carefully designing her financial plan, and educating herself about market history and volatility, so she would be prepared for a bear market, and wouldn’t “over-react” when one came along.  She figured that she could afford to invest $100,000 per year over the next 10 years, and vowed to make sure that happened every year no matter how the market was acting. Because she spent all her time designing her financial plan, she didn’t have much energy for mutual fund research, so she decided to simply invest her money in an S&P 500 index fund, to keep things simple.

Robbie’s plan started off fairly well.  He invested $100,000 in the Parnassus fund at the end of 2006, and again at the end of 2007.  At the end of 2008, the S&P looked pretty scary to him, and it seemed like the economy was in deep trouble.  Robbie didn’t panic and sell his Parnassus holdings, but he did decide to “hold off” on new investments until “things settled down”.  That year he placed his investment into a money market fund earning 2%. By the end of 2009, the market had recovered powerfully, and the Parnassus fund was up by over 60%.  Robbie felt a great sense of regret that he missed a return of 62%, so he decided to bank his savings in a money market fund at 2% until the market “pulled back”.  He is still waiting for that pending correction to deploy his cash.  Because the market has never “pulled back” by enough to look good to Robbie, he has continued investing $100,000 at the end of each year in a money market fund, at a 2% return.  By the end of 2016, Robbie had built a nice nest egg of $1,369,000

Penny put her plan in writing, and remained proactive about her plan.  Even in 2008 when it seemed like the world and the markets were coming to an end, she closed her eyes, held her nose, and invested her proscribed $100,000 in the S&P 500.  By the end of 2016, Penny’s nest egg was $1,934,000

Who “outperformed” whom?


Having a Plan

The very best investors have a disciplined approach to making portfolio decisions, and always stick to their plan, no matter what the rest of the world is doing. They are optimistic and focused on the long term growth of capital that can arise from investing in an innovative and productive economy. They don’t let their emotional reactions to news headlines throw them off track, and they understand that a well-designed written investment and financial plan will result in long term success.

No predictions. No witch doctor investment sorcery or magic investing formulas. No “Black Boxes”. Just intelligent planning, patience and discipline.


About the Author:

Erik is one of the co-founders of Concentus Wealth Advisors and currently serves as the Chief Executive Officer of the firm. With over 25 years of industry experience, Erik guides the firm’s overall strategy. After graduating from Amherst College in 1991, Erik spent a year working with Rittenhouse Capital Management, before joining Gerald in 1992. Erik currently holds his general securities registrations and insurance licenses, as well as CERTIFIED FINANCIAL PLANNER™ and Chartered Financial Consultant designations. In addition to his formal designations, Erik has appeared on CNBC’s Worldwide Exchange, Fox News’ America’s News HQ, Live Well’s Mary on Money, CN8’s Money Matters Today and The Real Estate Connection. In 2012, Erik was one of thirteen advisors named to Main Line Today’s Top Financial Advisors list. Erik lives in Bryn Mawr, PA with his wife and three children. He serves on the boards of the Philadelphia Chapter of the Salvation Army, Acting Without Boundaries (serving young people with disabilities) and The Holy Child School at Rosemont. In addition, he is on the financial advisory board of the Sisters of St. Francis in Media, PA.

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