Waking up early in the morning before the
sun is up and heading to the gym comes hard. Once your workout ends, though,
you often begin the day with the payoff of a tremendous energy boost. Can the
same process apply to your finances?
If you’re like most people, you exercise for many reasons
but expect to benefit from your sweat equity in the future, not in the current
moment. We will all encounter health issues at some time and the medical world assures
us that we’ll deal better with problems if we get – and stay – physically fit.
Preparation matters.
Exercising
& Financial Planning
What does exercise have in common with financial planning
and investing? The answer: Very few individuals prepare to invest, except maybe
when selecting from choices in a retirement plan.
Or not: Studies showed that even in the teeth of the Great
Recession and perhaps the most volatile market year in history – most 401(k) retirement
plan participants made no changes to their contributions.
Getting back to the fitness analogy, exercise’s greatest
benefits come from the stress we intentionally place on our muscles so that
when a health problem arises, our bodies are in better condition to deal with
the situation. Regarding investments, you need a methodical (and regularly
visited) regimen for taking in and processing market data. You also need a strategy to accommodate unforeseen yet
inevitable future events, such as market downturns.
Don’t let random financial news clips guide your decisions.
Filter out market noise when determining how to act. For the record, you need
not reallocate asset classes or otherwise change your portfolio just because
something in the market changed. You do need to be prepared to consider
adjustments when the information dictates that conditions shifted, such as
stocks increasing to a higher portion of your portfolio than you want.
Your Investment Playbook
Financial professionals call this an investment policy
statement. Or you might prefer the term “investment playbook.” The playbook
outlines your holdings and specifies how you intend to respond to change with a
disciplined approach aimed at particular objectives – as opposed to the usually
heated emotions most of us feel in a suddenly rough market.
How are your holdings doing against benchmarks such as the
Standard & Poor’s 500 Index? Specifically, at what point will market shifts make
you re-allocate percentages of stocks and bonds in your portfolio?
Your playbook also describes what you’re trying to achieve
as an investor – pay for retirement or for college tuition, for example – and
how you’ll react to market changes. You might plan to sell or buy only if the
S&P 500 hits a certain number or invest in oil if the cost per barrel drops
to a pre-set price. A well-designed playbook keeps you from panicky decisions
or from freezing up during Wall Street roller coasters.
Your playbook needs to clearly document your investment
information sources, the technology involved in your investing, and why you bought
a particular investment.
Remember: Great stock or mutual fund opportunities may arise
and shimmer, but if they don’t match your playbook, you pass.
At the gym, you can wander among the clanking weights or plan
exactly how to invest your energy. You know which method works better.
Investing is no different.
