STOP!!
DON’T DO IT!!
You just had a conversation with your second cousin’s husband over Thanksgiving dinner, and he gave you this “great” investment idea or financial advice. His pitch was persuasive, and that finance class he took in college, along with his morning habit of reading the Wall Street Journal, makes him seem credible. In all reality, that extra dose of tryptophan from your second helping of turkey doesn’t only make you sleepy, it also makes you susceptible to bad financial decisions.
This is what happens around the Thanksgiving table. We connect with friends and family we haven’t seen in ages, and we talk football and finances. Some of us will be more vulnerable this year as maybe our portfolio (or football team) has been underperforming our expectations. To combat these temptations to ready-fire-aim on a modification to your portfolio or plan, I wanted to walk you through the appropriate process.
Some of you may be laughing about the manner I’ve set up today’s discussion, but I’m telling you that these Turkey Time Temptations are real. I’ve had a front-row seat to a lot of foolish financial activity, and in my postmortem, I come to find that it all started at the Thanksgiving dinner table.
With that said, here’s the appropriate step-by-step process for introducing changes to your portfolio/plan:
(1) Define Objectives
I always refer to investments or allocations to puzzle pieces, as a reminder that each piece has its place in the creation of a greater picture. The “great picture” for you are the goals and objectives outlined in your financial plan. Each investment idea should be assessed on the merits of fit, not based on its appeal or potential upside. Does this investment or planning idea for YOUR financial plan? In order to answer that question, make sure you define your objectives first.
(2) Analyze/Assess Current Situation
Next, you need to have a good understanding of how everything is currently working. In personal finance, people like to tinker and fiddle with their portfolios. As an old bank executive once said, “Investing is like a bar of soap, the more you handle it, the smaller it gets.” So, first, we need to assess our current situation and get a lay of the land because if it ain’t broke, don’t fix it.
(3) Dialogue & Feedback
Now, a good reminder that this isn’t, or shouldn’t be a solo mission. You need a trusted and reliable source to bounce ideas off of and dialogue about all of this. My preferred partner here would be your financial advisor, not your seat-neighbor at Thanksgiving. These discussions will focus on steps one and two – what are we trying to solve for (objectives), and where does the current design lacking?
(4) Recommended Modification
Once we’ve identified a hole or two in our puzzle, we should begin recommending the needed added pieces. These recommendations should be objective-driven and should clearly spell out how this modification improves one’s likelihood of achieving those stated objectives. The argument can’t just be that this seems like an intelligent investment or that this looks to be a profitable idea – it needs to be right for YOU.
(5) New Design
There should be a one-pager, a succinct illustration of this new design. Clarity is key here. I can’t tell you how many conversations I’ve had where I ask, “Why do you own this?” or “How does this fit into the overall strategy?” and the response is just blank stares. If you’ve hired an advisor to oversee all of this, then you don’t need to be able to regurgitate all of the granular parts of the plan, but the ability to provide a general overview and defend the design is recommended.
(6) Implementation
This is a key step and an important differentiator from the design phase. The design process always deals with the macro or big picture, while implementation defines how you actually go out and execute that idea. I can give you examples of lots of investment ideas that are good in theory but cannot be easily implemented. So, if making portfolio modifications, you might have settled on the appropriate allocations, and now you need to map out what accounts each of these allocations should be held in – based on taxes and liquidity needs. Maybe the current allocations have hefty unrealized gains, which leads you to an implementation phase that’s gradual versus immediate.
(7) Review
Where do we stand now? What needs to be done? How do we go about doing it? And then, we review – what did we do? This may seem redundant but affirming everyone is on the same page is very important. Imagine you, and I were planting a garden, and you were under the impression that I had strawberry seeds, yet some months later, cucumbers were popping up. You want to avoid surprises, and you do that by regularly reviewing expectations. Results don’t matter in isolation, they matter relative to one’s expectations.
(8) Pivot (if needed)
As we often discuss, life does throw curveballs. Our financial plan should be written in pencil. As life changes, so do objectives, which means we may need to pivot. A plan that builds in these flexibilities is wise. When committing to investments or strategies that are more permanent in nature, we need to understand how this lack of flexibility could impact the need for future pivots. These are referred to as pivots intentionally because they are meant to be small redirects. If you are finding yourself regularly making wholesale changes to your approach and strategies, then you should refer back to step three and consult your trusted advisor. Again, just like gardening, when we plant these seeds of change, we need to be patient and allow them to bear the intended fruit. Impatience may be one of the greatest enemies of successful investing.
If an eight-step process seems like a lot, it’s because it is and it should be. We don’t want to make knee-jerk decisions when it comes to our personal finance. Why? Because unwinding bad decisions can consume more time and energy than the actual original implementation.
As for me, I often find myself on the other end of these holiday conversations. As a financial advisor, I’m often being peer pressured into ditching any sort of process I normally rely on. I’m being poked and prodded to just give one quick stock tip or some off-the-cuff tax advice.
Friends, don’t fall victim to these Turkey Time Temptations. Enjoy your family, enjoy your friends, enjoy the fellowship, and enjoy the gravy. As for your finances, commit all those decisions to the process we laid out today.
