Preparation is key to financial success

Preparation is key

If you have ever attended a closely-matched sporting contest and witnessed a buzzer-beating shot in basketball, an extra inning baseball game, or a shootout in a championship soccer match, it is an experience you are unlikely to forget. In fact, if you take a minute to reflect on it, you will likely remember many of the details of the contest: the call by the referee, the roar of the crowd, and the feeling you had – good or bad – when the outcome was decided.

Most of us simply don’t have feelings that strong or memories that vivid from games we watch on television. Similarly, we usually get no lasting feeling whatsoever from hearing about the contest or reading about it the next day. There simply is nothing like being there. The experience is far more intense live and in person. The pressure is palpable.

There is an adage in sports – pressure is something you feel when you are not prepared.

There is an adage in sports – pressure is something you feel when you are not prepared. How can Jordan Spieth sink the 5-foot putt with so much money and the title on the line and with the added pressure of all those people watching? Because, he has made the putt thousands of times in practice, rehearsing the situation in his mind so that when the critical moment arrives, it doesn’t seem so scary. He makes the putt because he has prepared.

This is one reason our firm spends so much time talking about what to do and what not to do when financial markets misbehave. If you know what to expect, the situation is less likely to seem so scary and you will be more likely to stick with your well-designed plans.

We’ve shared a lot of statistics about market behavior over the years but today, when markets are at near highs and relatively calm, we want to talk about the noise that comes with downturns.

We are not fans of the financial media. The media is simply not in the business of helping you make good choices. They are in the business of selling ads and to accomplish that, they need more readers, viewers, or website visitors to justify their value to advertisers. To draw attention, the content must be provocative.

Media outlets want strong opinions, tweetable writing, and pithy soundbites. Depth and precision are not required. In fact, they would rather the content annoy or incite consumers because the emotionally charged consumer tends to come back for more.

The media is not the only source of noise

When the financial markets are volatile, we must keep in mind the media is only one source of unhelpful noise. In fact, the media is easy for many clients to deal with because they have learned to view the media as a distraction at the least. Like us, they view the media as an adversary of patience, discipline, and prudence.

The other significant source of noise comes from people we personally know and like. Their influence can be harder to handle because it is personal.

During the Great Recession, a client called stressed about the markets. The rational side of his brain knew he did not need to sell any of his holdings to meet their expenses for several years. His wife, however, was pushing him to cash out.

She usually didn’t pay much attention to investment issues but once the financial crisis got going, she couldn’t help but tune in. At the time of the call, the U.S. stock market was down about 40%, so it was perfectly reasonable she would be concerned. With that type of decline, the issue isn’t whether you are concerned, the issue is what will you do about that concern.

To make matters worse, a neighbor she respected bragged about getting out after the market had dropped about 20% and how happy he was to protect his assets. Hearing this, the wife had heard enough but the husband didn’t want to abandon their investment plan.

A spouse is often the most influential voice in our lives. They can bring tremendous pressure to bear.

Preparation pays off

We were prepared to make good decisions on behalf of our clients and after meeting with the couple, they realized they were more prepared than they thought. The key that allowed them to stick to their plan was the financial planning process and the Investment Policy Statement (IPS) that came out of that planning.

They settled on the risk level in their portfolio after engaging in the financial planning process. The portfolio structure was constructed to maximize the odds that they would achieve their financial goals. We memorialized that structure and described how the portfolio would be managed in their IPS. This was all done when no one on TV was screaming that the end of capitalism was upon us.

By walking through the financial planning process again, they recalled that their plan expected markets would be volatile, even very volatile on occasion. This was just one of those occasions.

When markets are down, there are actions that can be beneficial in the long run but cashing out of stocks is not one of them. Staying broadly diversified and rebalancing, as outlined in the IPS, are beneficial actions.

By reviewing how things looked relative to their goals, the couple could see they were not as bad off as they feared. By reviewing why they were invested in certain asset classes, they reunited with their rational mind and we were able to make the needed adjustments on their behalf. Their balances recovered quickly as the market rebounded.

This year, Alabama won the College Football National Championship title again. If you didn’t see the game, it would be easy to think the outcome was never in doubt, but the overtime game was a thriller to those who witnessed it live.

Today, it may seem like it was a “no-brainer” to stay the course during the Great Recession, however in real-time, exercising discipline and patience was far from easy. It is unlikely to be easy next time if you aren’t ready for the noise.

About three years later, our clients came to learn their bragging neighbor wasn’t so savvy after all. He gave the impression that his cash out decision was due to rational analysis, but it turns out he had panicked. He was telling people about getting out to make himself feel better. He was actually very nervous during the time he was in cash. He thought he should probably be buying at the low prices available at the time, but fear of prices going lower had paralyzed him.

The next time the markets tank, and they will, you can count on us to know what to do, when to do it and how.

The recovery didn’t help his anxiety either. He never got back into the markets. He had not only missed the recovery, he had made only a small pittance of interest and was losing purchasing power at a time when inflation was low. He let the noise distract him and trained his attention on trying to outguess the short term rather than assessing what actions would help him in the long term.

Whenever the markets misbehave, pundits will say it is a test for the markets and for capitalism. History shows it is really a test of who has the resolve, discipline and patience to be a true investor and who doesn’t. The next time the markets tank, and they will, you can count on us to know what to do, when to do it and how. It may not be easy for any of us to tune out the noise, but by being prepared, we are all more likely to make good choices.

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Moisand Fitzgerald Tamayo, LLC is an Orlando, Tampa and Melbourne, Florida based fee-only financial planner serving central Florida and clients across the country. Moisand Fitzgerald Tamayo, LLC specializes in providing objective financial planning, retirement planning, and investment management to help clients build, manage, grow, and protect their assets through all phases of one’s life and the many transitions in between. If you have any questions or would like to discuss anything further, please give us a call or send us a note. If you are not a client and wish to receive emails notifying you of new posts – no more than once per month – fill out the subscription information in the sidebar to the right. For more frequent updates, follow us on FacebookLinkedIn, or Twitter.  

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About Dan Moisand

Dan Moisand is a fee-only financial advisor with Moisand Fitzgerald Tamayo, LLC. He is a regular contributor for multiple outlets, including Florida Today, MarketWatch, and The Wall Street Journal. His writing and financial advice have also been featured in Financial Planning, Investment Advisor, Wealth Manager/Advising Boomers, Forbes, Smart Money, and The New York Times, among other publications. He is the only two-time winner of the Journal of Financial Planning’s “Call for Papers” competition and has been named a top financial planner and advisor by multiple publications. Investment News named Dan one of the “twenty most influential men and women” in the history of financial planning. He currently serves on the Board of Directors for the CFP (Certified Financial Planner) Board.


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