Reducing Your Plans to Writing Is The Winning Course

By Sam Martin, MBA (TAX), CFP, CPA

As I write this installment of the Wealth Management column for Catalyst magazine, I can look back to the late winter of 2009 and see that we have had mostly good-to-great stock markets in the years since. 2015 on the other hand has become quite volatile-more on the negative side than the positive (and of course, no one worries about the positive).

Almost immediately, we hear the drumbeat of doom and gloom. The stream of negativity can play upon our emotions until we are apt to do something not in our own long-term best interest-like abandoning our asset allocation strategy; selling low; or becoming susceptible to the insurance product being hawkishly peddled or other alternative investment approaches that sound too good to be true. Trust me: we always come to regret these emotional decisions.

Overcoming Emotions
As humans, we are wired positively backwards for long-term investment success. We tend to want to jump on the bandwagon when markets are up and become fearful when markets tumble. This rotation of greed and fear leads to buying high and selling low, a guaranteed process by which to undermine your long-term returns. So how do we help to overcome this emotional cycle?

Knowledge and Written Plans
There are a few facts that well understood are the key to long-term investment success:
1. If you expose any significant portion of your long-term investments to the stock market you will experience down periods of time, and sometimes significant down periods of time like 2008 (and 1973-74 and 2000, 2001, 2002). To expect otherwise is just ignoring the facts, setting you up for disappointment and failure.
2. In modern history, every market downturn to date, regardless of severity, has been followed by an upturn. We do not know the timing, but short of global cataclysm there is no reason not to expect such rebounds in the future.
3. Diversification, especially smart diversification, can help to buffer equity markets; so also does exposure to high-credit fixed-income instruments (CDs, bonds, etc.) appropriate to your age and situation.
4. Having your goals and concerns documented in a written plan that is monitored on an ongoing basis will help you to stay the course and keep on track.

Harvard MBA Study:
For those that read this column each quarter, you will recognize the following, and it’s well worth repeating from time to time to document its power. In 1979 Harvard MBA graduate students were asked if they had set clear written goals for their futures and a means to accomplish them. The result was that only three percent had written goals and plans, and 13 percent said they had goals, but not in writing-leaving 84 percent of the class who did not have clear goals at all.

Ten years later, the same group was interviewed again and here are the results: The 13 percent of the class who had nonwritten goals were earning twice as much as the 84 percent who had no clear goals, and the three percent who had written goals were earning, on average, ten times as much as the other 97 percent of the class combined. Yes, combined!

If this study is not a demonstration of the power of writing it down, I just don’t know what is! But how does this help me invest successfully?

If you go to the trouble to build a plan to achieve your goals and address your concerns and take the steps to first reduce your plan to writing and second establish a regular system to monitor your progress, you will look more like the three percent than the 97 percent. Although it is necessary to have at least a reasonable investment strategy, investor behavior becomes much more important than having the “perfect” portfolio. Willingness to do a few simple things will make you a long-term investment success:

1. Establishing a lifestyle that allows you to save at a pace that, combined with reasonable long-term investment returns, will allow you to retire comfortably and achieve other financial and quality-of-life goals.
2. Reviewing your progress on a regular (but not too frequent) basis will help to confirm that you are on track or whether adjustments may be necessary.
3. Adjusting your plan as life happens, as you age, or at other important junctures-not based on the market but based on your plan.

To achieve this, most of us (the 97 percent?) will need some help. Working with a fiduciary-based, fee-only financial planner is probably the smartest financial step any one of us can take. If you are a dental professional, it further makes sense to work with a planner whose clientele consists of many or mostly dentists. Most planners can help you with your personal budget, but not your practice income. Working with someone who understands what is unique or special about dentists and their practices can be of great benefit. However, regardless of whether you do it yourself or hire an appropriate advisor, get it in writing!

When markets drop and many panic, you will be much more likely not to. You might even recognize the panic of others and take solace in the fact that you are not joining them. You have a rational plan and from the start, you knew that the price of long-term investment success was to live through the inevitable down markets. It may not be fun, but you will accomplish sitting still, patiently staying the course. You may even take great pride in having weathered yet another bear market and coming out the other side back on course and looking good.

Control What You Can Control
In thinking about investing, there are things that you can control and things that you cannot. For example, you can decide how much equity (stock market) risk you are willing to expose yourself to and you can strategically diversify your equities in order to improve the efficiency (expected risk versus expected return). You can diversify your portfolio and dampen the volatility of the equity portion by investing in high credit, short-to-intermediate fixed income vehicles (bonds, CDs, etc.).

You can also control how much you save. Completing the process of establishing your goals and concerns and crafting a written financial plan goes a long way in terms of improving the odds you will achieve your goals. One aspect is committing your savings goals to paper and then automating the process to the extent possible. Those with written plans are much more likely to be better savers than those without, as the Harvard MBA study might suggest. You can also control your emotions about negative markets. Maybe you cannot eliminate those emotions, but you can overcome them with education and by taking some simple steps during a protracted down market:

1. Stack up your statements in the corner (you know they are depressing-why wallow in it?).
2. Turn off the news. Turn on music, drama, or comedy.
3. Count the number of historic downturns and remember that there has always been a following upturn.
4. Call your trusted advisor to have a discussion about the current situation. If your advisor is like us (and we are happy to show you) your advisor will be invested just like you and will also go through the ups and downs with you.

You Plan Is Not Just About Investments—There Are Many Other Important Things In Life
Think about who and what is important to you. Having a great investment strategy and platform is terrific, but it won’t help you if a semi crosses the barrier and runs into you on your commute home tonight.

1.Risk Management. There are some risks you can mitigate and many risks you can transfer, or at least hedge, through various types of insurance. There are at least 12 different types of insurance an active dentist with a family might need at a given point in time. A significant portion of your plan should be to identify risks and take the appropriate steps to address them and this is often an ongoing process as children are born, debts are taken on and eventually paid down, as the practice matures and is eventually transitioned, and the post-full-time work era of your life is reached.

2. Estate Transfer and Planning. Making sure you are taking care to see that your loved ones are taken care of—that your assets go where you intend and that there is a transition plan while you are still in practice—are all very important. Depending on the size of your estate (plus life insurance) and the state in which you live, estate tax planning may be very important to see that your assets stay out of the hands of the government.

3. Wealth Enhancement. Creating additional savings through proactive income tax planning for you, your practice, and your investment portfolio can make your long-term savings goals easier to accomplish. Increasing the profitability and value of your practice can also help immensely.

4.Creating a Transition Plan. Including your practice transition plan for your practice is an important piece of your comprehensive financial plan. This is true whether you are five months, five years, or 15 years from your practice transition goal. Enhancing the value of your practice and planning proactively to optimize the tax treatment of the sale are things you can and should plan for. Knowing the estimated after-tax value of the practice is an important factor in the overall plan.

You cannot control the markets, but you can control your behavior. You can get your plan on paper, you can decide how and how much to expose to the markets and you can educate yourself on what it takes and what you have to live through in order to be successful in the long haul.

You can also control the time you spend with loved ones, friends, and endeavors you enjoy or that enrich you. Let’s put the plan in place, agree on how often to review it, and then focus on what is really important.

Click here to see the original article.

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