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You probably started this year with some resolutions for intentions in various areas of your life. Now that a few weeks of 2023 have passed, how are you doing?
The start of the year is a good time to re-examine the way you make financial decisions. Do you have concrete goals and a plan to accomplish these goals, or do you make investment decisions based on what’s happening in the markets today?
Think back to 6th grade or so when you were taught the order of operations for solving math problems. The same principle applies to financial decision-making. The sequence you follow matters. If you skip over the goals and plan, you end up making knee-jerk decisions that don’t match your intentions.
A retirement-age couple came in a few years ago and asked how our overall client portfolios “were performing.” They were interested in the absolute performance of investments rather than performance relative to particular goals. I explained that investment “outperformance” wasn’t really a goal; investing for a purpose, on purpose was the sequence we followed.
To have traction, your goals need to have meaning. They need to be important to you. The goals should be realistic so that you can reasonably structure a plan for achieving them.
If you skip over the goals and plan parts, you end up relying on prognostication for your financial future. Who exactly are you going to trust for these predictions about the future? Regardless of the answer to that question, it’s critical to understand that the future isn’t knowable. The broad economy nor the market can be consistently and accurately predicted. In the end, you can’t make smart financial decisions out of something unknowable.
Your financial future depends on planning and preparation, not prognostication.
Remember the order of operations and establish goals based on what’s most important to you. These goals provide the basis for you to create a financial plan and from there, decisions can be made within the proper context.
The more that you let your financial plan guide you, the less that you will be tempted to react to short-term events. The path toward poor investment performance often starts with diverting your attention from your plan and reacting to current events.
The stock and bond market turmoil during 2022 provided ample opportunity to test your resilience. Market declines are never pleasant, but historically always temporary.
When planning for the future, it’s worth remembering that your investment decisions are usually focused on particular segments of the economy rather than the macro economy at large. There have been many times in the past when the markets performed well while the broad economy didn’t. Don’t over analyze the short-term economy. Make investment decisions that match your long-term goals.
Once you have your goals and financial plan in place you’re ready to make good decisions. Remember that the things you value most today, (your goals), will likely change over time and therefore your financial plan should be adaptable and dynamic as well.
What your financial life looks like today is the sum of all the decisions that you’ve made along the way. If you want your financial picture to change for the better, start by establishing concrete goals. Goals first, plan next, and finally, invest. That’s the proper sequence to follow. Ready for a real conversation?