Yankee great and Hall of Fame catcher Yogi Berra may be the most quotable athlete ever. The malapropisms attributed to him are legendary and, when viewed through a particular lens, are more useful than at first glance. While not likely to threaten Warren Buffett’s ‘oracle’ status, if Yogi hadn’t chosen baseball, he might have become a Hall of Fame financial planner.
Here are three financial planning tips based on wise words from Mr. Berra.
'If you don’t know where you’re going, you might end up someplace else.'
In financial terms: Start with a plan.
A comprehensive written financial plan is one of the most underappreciated tools for investor success. Unfortunately, many people ignore this critical effort, in part because it can be very time consuming, detail-oriented and tedious. However, it’s also the blueprint for a person’s entire financial “house” and, done well, provides the firm foundation on which all else rests.
An investor’s personal headlines are at the heart of a financial plan, which is an invaluable tool for helping investors through unsettled times. The plan focuses on the unique goals and considerations that the investor said were most important to them. Portfolios or strategies should change over time, but those alterations should be in response to changes in an investor’s headlines — the birth of a child or pending retirement, for example — rather than the headlines in the news.
Having a well-thought-out financial plan is often the behavioral anchor that investors need to contend with the uncertainty and doubt that investing entails.
'Ninety percent of the game is half mental.'
In financial terms: Realize that investing is often emotional.
In theory, investors make rational decisions, but that theory often fails in practice. Emotions can play a significant role in investment decision-making.
The process of investing is a mental game, often punctuated by unexpected events — some good, others bad — when our very human fight-or-flight reflex seems overwhelming. This is when the temptation to do something different can be strongest.
What can an investor do to improve their odds for investment success?
First, mentally prepare for losses as well as gains. Investing is an activity that requires the bearing of risk for the hope of a return on the investment. However, there are no guarantees that ensure success. While asset allocation and diversification are the two most effective risk-management tools at our disposal, they do not immunize the portfolio from all volatility or losses.
Second, prepare for doubt. Something — at some point — in the future is going to make an investor question their investment strategy. Having a financial plan in-hand when this doubt arises frequently pays huge dividends. Often, it is easier to stay the course when things don’t work out as planned, than when things didn’t work out because you failed to plan.
Lastly, embrace inactivity. Too often, staying the course is interpreted as “doing nothing.” This is a shame because it actually means something powerful: Have a plan and stick with it unless your situation — your personal headlines — changes. During emotionally charged markets, snap decisions often do not play out as well as intended, destroying wealth rather than creating or preserving it. Ignoring the media and market noise isn’t being ignorant, it’s being enlightened.
'When you come to a fork in the road, take it.'
In financial terms: Perseverance is the key to progress.
As mentioned above, investing is an emotionally challenging journey that forces us to contend with obstacles — both real and imagined — along the way. For some investors, these obstacles cause them to stay put, halting their progress. For others, these “forks in the road” require them to choose a path and continue forward, despite the certain knowledge that the path forward is filled with further uncertainty.
Take the current environment, for instance. With the U.S. stock market at or near all-time highs and bond yields very low, it seems like few investors are completely comfortable with the path ahead. Whether in bull or bear markets, for some investors it never seems to be the “right” time to invest. While most investors invest knowing that higher expected returns come from higher expected risk investments, too often they fail to complete the thought: While this risk-return relationship is reasonable, it is over the longer-term — not the short-term — where it is most (yet, not perfectly) reliable.
Preparation is the key to overcoming these obstacles. If you know that you’ve prepared a thoughtful financial plan that focused on your long-term objectives, and incorporated asset allocation and diversification to help temper risk, you should find it easier to persevere through whatever the market may throw at you in the short-term.
All information presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, product or service, nor should it be construed as tax or legal advice. Please click here to see our blog disclosure, which immediately follows the “Applicable Law and Venue” section.