WHEN I FIRST BEGAN investing 16 years ago, I threw a bunch of investments at a wall to see what would stick. Someone I respected encouraged me to invest in master limited partnerships, so I purchased a few companies. I had no real idea what an MLP was or did. Sure, I spent some time surfing the net. But that was about it.
Fast forward one year to tax time. I had lost money and had no idea I had to file with the IRS for an extension, as I awaited the arrival of the Schedule K-1 tax forms from the companies. Why did I purchase them in the first place? This became the moment when my naiveté hit me. Clearly, I needed a plan, not a hodgepodge of investments.
Since becoming a financial planner and working for a large registered investment advisor, I’ve had the privilege of interacting with numerous clients. Their questions and concerns, coupled with my time spent in financial planning and investment management, have changed my views in many ways. Today, these are four of my core beliefs:
1. Keep it simple. No one wants to review a 50-page financial plan. No one. Part of the creativity in financial planning is distilling a client’s goals down to what’s important and manageable. People are more responsive and successful tackling financial goals when the necessary steps are served up in smaller doses.
2. Don’t get sold. When we first meet clients, we see so many broken portfolios. Leveraged exchanged-traded funds (ETFs). Concentrated holdings. Expensive active funds. Variable annuities. We’ve yet to encounter a client who went knowingly into these products or who later had no regrets.
In most instances, these purchases reflect a persuasive salesperson, rather than the investment’s inherent appeal. Take a recent innovation: inverse volatility ETFs. During the recent market hiccup, their value fell to near zero and at least one fund provider decided to close its fund.
3. Let the plan work. I couldn’t tell you what my daily investment balances are. I don’t look at my monthly account statements. This is because I have a solid plan that already accounts for days like we’ve seen recently. We take the same approach with clients, knowing there will be good days and bad days. The focus is on what has been proven to work reliably over the long-term.
4. Control what you can. We can’t control or time the markets. No one has a copy of tomorrow’s newspaper. But we can control our asset allocation, how often we trade, what we pay for our investments and how disciplined we are. The harsh truth: Index funds outperform more than 80% of hardworking, intelligent, active Wall Street managers.
Taking action, for the sake of doing something, doesn’t build wealth. Adhering to a sound plan—and focusing on what we can control—ultimately enriches us the most, while also allowing more time for the important things in life. To be sure, this approach may seem simple. But as we’ve witnessed in recent weeks, it certainly isn’t easy.
Anika Hedstrom’s previous articles include Betting on Me, Along Came Sheila and Gold Dust. Anika is a financial planner with Vista Capital Partners in Portland, Oregon. The views expressed here are her own and not those of her employer. Follow Anika on Twitter @AnikaHedstrom.
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