Investing Without Goals is a Bad Idea
by A. Scott White, CFP®, ChFC, CLU
Sometimes I am approached by well-intentioned people who tell me they are disappointed in the investment advice they have been receiving and would like to transfer their investment accounts to me to see how my advice works out for them. When I ask if they have a comprehensive financial plan that identifies their investment goals with a timetable to reach them, they often tell me they are not interested in all that—they simply want me to make them some money. To which I reply, “You might be better off working with your current advisor.” And I mean that sincerely. Because in my mind, the advisor they are currently working with must be as misguided as the person requesting the investment advice.
How in the world can a competent advisor advise a client on how to invest money if the client doesn’t know how much money is needed, and when it is needed? If those questions can’t be answered, how can an investor possibly measure investment results? “Let’s try it out for a few months and see how it goes” is not an investment goal. If monthly statements show an increasing account balance, is that good, or if monthly statements show a decreasing account balance, is that bad?
That kind of thinking is preposterous.
Most financial institutions publish monthly statements using dollar weighted returns, instead of calculating returns on a time weighted basis. One of the most common mistakes an investor makes when evaluating investment performance is using dollar weighted returns, because they shed little light on an investment’s performance when money is deposited or withdrawn from the investment account. Looking at a monthly balance without being able to measure its contribution to achieving an investment goal is similar to measuring the emotional state of an investor. And an investor’s emotional state is easily manipulated by some of the world’s best salespeople—with sizzling investment stories about a new product that could change the world or an economic forecast only they can see because of their superior research. Come on, why don’t they just tell the investor they have a magic crystal ball that can see what will happen in the future?
The attitude of “let’s just see how the investments pan out” without defining a time frame or goal completely ignores investment risk. I’m not talking about the ill-suited risk profile questionnaire many financial advisors use to determine an investor’s “appropriate asset allocation.” In reality, those questionnaires really measure how an investor feels at the moment. If accounts go down in value, an investor will feel more risk averse, and when account values go up, an investor using the questionnaire will feel more risk tolerant. Based on that, should an investor change the portfolio? That would mean that when portfolios increase in value, the investor should be more aggressive, and when accounts start dropping in value, the investor should change the portfolio to be more risk averse. Why doesn’t the financial advisor using these questionnaires just come out and tell the investor, “We’ll buy high and sell low,” because that is a highly probable result.
But the risks I’m taking about are the real risks of investing. These include being forced to sell an investment when it is worth less than the price you bought it for, constructing a portfolio that is not properly diversified, and market risk, exchange rate risk, purchasing power risk, business risk, default risk, interest rate risk and sector risk.
While most investors might know how these risks could impact investment returns, there are many other risks that competent financial planners take into account to assess their possible impact on achieving specific investment goals. Some of those additional risks include foreign securities risk, political risk, regulatory risk, duration risk, liquidity risk, diplomatic risk, credit risk, counterparty risk, custody risk and lack of information risk. All of the non-market risks can be eliminated or controlled to an acceptable level in a well-designed portfolio built to reach specific goals within a specific time frame. But I couldn’t create a well-designed investment portfolio without knowing how much a client is trying to accumulate by an identifiable date. To me, this is essence of investing. Otherwise, one is simply asking me for investment advice based on events that may or may not happen, like a presidential election outcome. That is not investing. That is speculation!
At Scott White Advisors, we begin a relationship by assessing our client’s financial condition, and set goals with time frames. Then we develop and implement a strategy to meet those goals and regularly review the results to adjust the strategy or the implementation as circumstances dictate. This process results in identifying and evaluating which risks could affect the probability of meeting our client’s goals. It allows us to design clear objectives for the investment portfolio to show how the investments are expected to help meet goals. Then we are able to create a written investment strategy to meet each client’s needs—an Investment Policy Statement.
The principal reason for developing a written Investment Policy Statement is to protect an investor from unplanned and impulsive revisions to a sound investment strategy during a time of market turmoil. In times of market turmoil, investors are often inclined to make investment decisions that are inconsistent with prudent investment management principles—and their own best interest.
So when an investor approaches me about investing and does not want to go through a comprehensive financial planning
process, I usually suggest they keep doing what they are doing. Without a comprehensive process and goals, I would be no better at speculating on future events that may or may not happen in building a portfolio than the advisor they are currently using.
However, if an investor wants to meet with me and discuss not only life goals and a time frame to reach them, but all the other things that go into a comprehensive financial plan, then I just might be the right financial planner for that investor. A comprehensive financial plan will include creating a plan for the family if the investor dies or becomes incapacitated. It will examine appropriate strategies to minimize the erosion of investments through credible tax planning, examine property and causality coverage for gaps and loopholes, or title investment accounts to minimize creditors’ and scammers’ access to the family fortune. Our plan will also maximize Social Security and retirement plan benefits, and include ways to create a legacy— to let the world know the investor once existed on this planet and what they stood for. Because if these things are important to an investor, then I am confident I can help to design an investment portfolio that has a better chance of achieving the investor’s goals.
The information contained in this report does not purport to be a complete description of the securities markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing materials are accurate and complete. Any opinions are those of Scott White Advisors and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date subject to change without notice. Past performance may not be indicative of future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Strategies discussed may not be suitable for all investors. Investing involves risk and investors may incur a profit or loss regardless of strategy selected. Diversification does not ensure a profit or guarantee against a loss.
Individual investor’s results will vary. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.