Planning for Physical and Fiscal Fitness

Waking up early and heading to the gym is tough. But once the workout is over, the payoff is often a tremendous energy boost. While people exercise for many reasons, they usually expect to benefit from their “sweat equity” not in the current moment, but in the future.

We will all encounter health issues at some time and the medical world assures us we will be better equipped to deal with health problems if we get – and stay – physically fit. Preparation matters.

Perhaps you’re asking what exercise has in common with financial planning and investing. Good question! The answer is very few individuals prepare to invest. Most folks look at the choices in their retirement plan and make selections. Studies have shown that more than 68% of 401k plan participants made no changes in 2008 — perhaps the most volatile market year in history!

Getting back to the fitness analogy, the greatest benefits of exercise 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. From an investment perspective, investors who choose to go it alone need a methodical regimen for taking in and processing market data. They also need to develop a strategy to accommodate unforeseen yet inevitable future events.

When it comes to market data, investors should not allow random news clips to guide their decisions and they must filter out market “noise” in determining how to act on the data. For the record, you don’t have to make changes in your portfolio just because something changed; but you must be prepared to consider adjustments when the information dictates conditions have shifted.

The financial industry refers to this as an investment policy statement. I prefer to use the term investment playbook.  The playbook specifies how we intend to respond to change with a disciplined approach aimed at particular objectives. It’s a much better approach than reacting to Wall Street and the media’s noise.  Great stock or even mutual fund opportunities may arise, but if they don’t match the investor’s playbook, they need to stay on the bench.

The playbook should describe what the investor is trying to achieve and how market changes will be managed. A well-designed playbook keeps investors from making emotional decisions or “freezing up” during confusing times like those the market experienced in 2008. The playbook should clearly document investment information sources, the technology involved in investing and why a particular investment was purchased.

I have been married for over 26 years and people continue to ask me how I met my bride Barb. The initial decision matters in marriage and it should matter in investing as well.  Why was an investment purchased and when will it be sold off?  Unlike marriage, stocks are rarely lifetime decisions!

When you go to the gym, you have can wander aimlessly or plan to invest your energy.  I think you know which one works best. Investing is no different.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.