Money is about more than money

Making money. Managing money. Saving money. Spending money. Giving money.

Money is about more than money.

The way we manage, think about, and act on acquiring and disbursing money is all about our values and priorities.

Money is an efficient mechanism for facilitating the exchange of value. What we do with it and how we make it and spend it is a reflection of our selves.

Principle # 2: Have A Plan

"Everyone has a plan 'till they get punched in the face." - Mike Tyson

“A good plan now is better than a perfect plan executed next week.” - General George S. Patton

Introduction

On the face of it the value of a plan may seem self-evident, but whether you get hit by an economic punch or have a sub-par plan, it bears repeating, because according to the 2012 National Consumer Survey on Personal Finance, nearly 66% of respondents did not have a financial plan. This is problematic, because in the absence of a plan, how do you know where you are going? And, how do you know how to get there? As Vanguard, the Valley Forge, PA fund giant puts it, “A carefully conceived financial plan is a must-have for every investor. It’s the blueprint that spells out the details of your short- and long-term financial well-being.”

Purpose

Carl Richards, author of “The One-Page Financial Plan” points out, “before you plan…you have to know why you are planning.” Richards goes on to say, “the best financial plan has nothing to do with what the markets are doing and everything to do with what’s important to you – your life, your dreams, your goals.” The purpose of a plan is simple. It provides a roadmap for your financial path. Planning is the process by which you take stock of your life, organize your financial affairs and better understand your values. It helps identify goals and aspirations, and charts a course for the future. A well constructed plan reconciles hopes and dreams with reality, imposes discipline upon the investment process, provides peace of mind and is the basis for all future conversations. It is your personal Rosetta Stone - the reference you return to over time.

                                                                                                                                                       

Basic Issues

A formal financial plan does not need to be fancy, but it should provide an accounting of your assets, liabilities, current and future income, risk tolerance, time horizon and goals. Core issues addressed within the context of a financial planning conversation are saving and spending habits, short term and long term financial goals, expected life changes, taxes, charitable giving, de-cumulation and the passing of wealth to heirs.

The Value Of A Plan

A plan communicates purpose and shows intent toward a goal, but it should also be flexible enough to adapt to changing circumstance. It helps you to think about the issues and align your life goals. A formal plan increases the chance of making good decisions and decreases the chance of making bad decisions. A plan helps remove emotion from the markets and imposes structure and discipline upon the decision making process. A plan creates buy-in and commitment to a course of action, and serves as something tangible against which to gauge progress. Above all a good plan should match with your personal and emotional DNA (it is no good having a plan if you can’t stick to it!).

Bottom-Line

A financial plan is about more than money. It is about why money is important to you and how that translates to your life. It is an insight to the inner individual. Having a plan is critical to establishing good financial habits and setting a path to the future. A plan is something that moves you from being reactive to events and circumstances, to something more measured in the management of your financial affairs. As such, it is probably a good idea to have a plan.

White Lies The Industry Tells Itself

The service we provide is valuable and worth every penny people pay.

Just wait till the next downturn. That is where we outperform.

I am a highly trained financial professional and deserve the money I am paid.

I control my outcomes.

We are investment focused (not sales/marketing focused).

Investments is what we are all about.

We can beat the market.

Costs don't matter when you beat the market.

This is an exclusive investment.

We have a differentiated product, process, people, approach.

We are active (not closet indexers).

We consistently produce alpha.

The quality and amount of our experts, technology, resources matters.

There is implied skill in our outcomes.

It is all about investing (not gathering funds).

Our costs and fees are fair. You get what you pay for. 

Tricks of the trade: change the base year; change the benchmark; gross of fees; advertise only the winners; spin the departure of a manager; change the risk measure that works best; look at our fund rating (even though it has no predictive value); focus on a three year record; selectively choose which funds, criteria, which period to advertise.

Transformation and Change aka Jumping the Shark

It is amazing how quickly change can flow through an industry.

It was not more than a couple of years ago that active management and fundamental-based research was the core of the industry. Now, less than 6 years after the financial crisis, active management is in full retreat and human-based fundamental analysis is increasingly marginalized. If I had to put a date on when active management jumped the shark, I would tentatively place it at 2014. Of course, active management still dominates the industry and that is not going to change for quite some time. But the secular trends are clearly in place and the level of knowledge and understanding among the masses is growing.

Information and computers have transformed the industry and the research function, and will no doubt transform the advisor function in the next 5 years or so.

Philosophical Predilections

Was thinking. They teach you to be an analyst in college. Or at least they provide you with the tools to be an analyst. Everyone comes out with the same tools. But you take on an investment perspective/philosophy when you join a firm. Investment management is unique in that there are literally many ways to skin the cat - many paths to market beating nirvana (sadly none of them guarantee success). Some basic principles are essential, but after that you can seek to beat the market in any number of different ways. One reason for this is because there is no unified theory of investing. There is no one empirically correct way to beat the market.

And so, how important is the philosophical predilection of a shop? and, What effect (or bias) does that predilection have on the analyst's analysis?

Does a value oriented analyst in a value shop overly discount everything? Does a growth oriented analyst in a growth shop overestimate everything? [do they even do any analysis!!! my little joke]

Does it make any difference if you have a value-oriented analyst in a growth shop or a growth-oriented analyst in a value shop?

I would say Yes to everything.

Dealing With Hardship

Hardship befalls most people in their life at some point. Some deal with it on a much greater scale, others for a much greater time, but hardship is just a stones throw away. Life and success and happiness are fragile. And just like health, you don't appreciate what you had until you lose it.

And everyone deals with it differently. Some go into their shell, others roll up their sleeves. Some are embarrassed, some are prideful, some don't want anyone to know (even as everyone knows). Time keeps on slipping away making it harder and harder to change get out of one's quiet desperation. 

Vanguard's Advantage Wasn't It Mutual Structure But It's Investment Philosophy

Vanguard's unique corporate structure is not why Vanguard is different and beating people. There is plenty of money to be made in Vanguard's corporate structure. Vanguard is successful because it's investment approach/philosophy conforms to financial theory (ie. it creates broad-based asset class products) and seeks to be the lowest cost producer. I guess not having to respond to profit pressures from shareholders is valuable, but a for profit company could have adopted the same strategy and been equally successful. In fact, Dimensional is an example of that as were Wells Fargo Nikko and Barclays Index which have since been subsumed. Mutual funds are in theory structured the same way as Vanguard, but when controlled by for profit entities are obviously not interested in doing everything in the client's/shareholder's best interests.