Access to programs offering the key tenets of investment management — asset allocation, diversification and rebalancing — has improved greatly in the past decade. This trend started when the Pension Protection Act of 2006 led to growth in target-date retirement funds in employer retirement plans. And it continues in a new form through many startups that offer automated investing using algorithms to identify and manage a portfolio.
These advancements have simplified and lowered the cost of investing, but they have not reduced the need for financial advice.
Before you evaluate which investment strategy is best for you, there are more important decisions to make and preferences to define that will determine how successfully you manage your personal finances.
As a financial planner, I think each investor should focus on four things before moving to wealth management:
Your goals. I find that even people who are smart and financially successful haven’t often spent much time documenting (or even thinking about) what it is they are trying to achieve. It’s important to develop both short- and long-term goals and understand how you want to live now and in retirement. You can extend goal development to include how much you want to support children with college or other opportunities, charitable giving ideas and other goals that require planning, money and time to achieve.
Your values. You might value free time and plan to create more of it by achieving financial independence as early as possible. You might value being engaged in work and expect to do it as long as you can. You might value flexibility, volunteerism, low risk and certainty over higher risk/reward but less certainty. Your values help create the framework for your personal financial decisions.
Your money personality. How do you treat money? Is it a tool to help you get what you want? When have you been good at managing money decisions? What are your money traps? What are your money-related emotions either during investment market extremes or when you have made large purchases? Money psychology research indicates that if you address your values and think about what goals and behaviors are important to you, you’ll exhibit better self-control around money and be motivated to make better decisions.
Your planning. What are the routes to get where you want to go? Which is preferable given your ability to save, your investment preferences, how long you have before retirement or other goals? What’s the probability you can achieve your goals, given relevant assumptions and expectations for the future?
These four topics are as valuable as the science of portfolio construction, risk management, tax efficiency, and other technical aspects of managing and protecting financial security.
The personal flavor you add to a quality plan is something an automated investment algorithm can’t translate. There may be an investment strategy but no advice or help to fit your financial capacity to your life.
Your investment allocation can’t help you decide if choosing to spend money on an experience now will provide life value that may be more meaningful to you than future financial return. A programmatic investment mix can’t identify what is needed for your definition of an acceptable living standard or show you what level of savings is required for the "nice-to-have" ideal living standard.
And even if your investment strategy is chosen by a sophisticated algorithm and automated so that you have fewer investment decisions to make, it will not provide certainty, persistent returns or outcomes specifically in line with expectations, either performance-wise or in the amount of time required to address your goals.
Where you can be consistent and introduce more certainty into your finances is with elements of wise planning. You can control your savings rate, how well you live within your means, making sure you are insured against risks, and advancing your knowledge and skill set to improve your income potential. You can control how you manage savings and participation in employer retirement plans or IRAs. You can control being organized, knowing the pieces of your financial puzzle and how they relate to your goals and timeline. All of these topics might be more important to your financial success than a prescribed mix of stocks and bonds.
Gary Brooks is a certified financial planner and the president of Brooks, Hughes & Jones, a registered investment adviser in Gig Harbor. Reach him at bhjadvisors.com.