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Focus on Money Matters, Not Investment Returns

Early one morning in 1999, I woke to the clock radio. The announcer was describing a study that proclaimed the nation's best profession was financial planner. And the reason? Pay was high and stress was low. I bolted upright and shouted, "Seriously? Low Stress?!"

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I was feeling, in fact, very stressed. At the turn of the last century, the S&P 500 stood at 1230 percent of its value in 1982 when I started my first financial planning business.

People were caught up in the idea of a new paradigm — and the latest dot.com. Many clients expected to retire at age 50 (55 at the latest), own multiple residences (worthy of "Architectural Digest") and earn 20 percent a year on investments. Forever.

For me, knowing that no trend is permanent, the task of getting clients to make decisions based on more realistic assumptions was daunting.

Today fear has broadly replaced euphoria with the S&P 500 unchanged from late 1999. The last twelve years saw two 50-percent declines in the index, waves of financial blows and the Great Recession.

This period has been difficult for folks financially and especially difficult emotionally. In the last decade, we advisers have all experienced talking to a client, paralyzed with anxiety, on the edge of the “go to cash” cliff (some folks seem to have taken up permanent residence there). And getting them to envision any future short of disaster was challenging.

In each of these opposing scenarios, clients zeroed in on investment performance — and recent performance at that — as the primary predictor of their financial well-being. While investment performance is clearly important, it is not the only, or even the main, determinant of success in meeting financial goals.

And yet somehow many advisers feel compelled to predict market values in a week, month or year. And they think that they’re helping clients by providing this vision. In reality, no one can control market behavior, the economy or world politics. Nor can anyone accurately and consistently predict what future will unfold.

The world and life provide us with events. We can and do make projections based on events and trends. However, no projection is guaranteed and each is always made with incomplete data.

Dalbar studies definitively show that a mutual fund’s average investment return over time significantly out performs the return experienced by its investors — because people move in and out of investments at the wrong time based on emotion.

So what can we advisers do to get clients to concentrate on the factors that will produce the greatest benefits? We can help them with the following:

  • Maintain adequate emergency funds.
  • Define clear needs, goals, priorities and timelines.
  • Align investment structure and portfolios with these needs and goals.
  • Determine safe spending levels.
  • Establish effective saving/investing practices.
  • Take appropriate risks.
  • Use tax laws to advantage.
  • Target an optimal and realistic retirement age.
  • Seek higher earned income if needed

These actions are critical whether markets are rising, falling or treading water.

We must clearly communicate that investments are always a means to an end and not an end in themselves. Our job is to inoculate clients against actions based on emotion, whether it is euphoria or fear. Helping them hold reasonable expectations, understand that all investments have potential risks, rewards and inter-relationships and to appreciate the value of diversification enhances clients' potential to make sound choices.

If financial planning and investing were easy, most everyone would be wealthy and financially secure. They are not.

We, as financial advisers, have the privilege and responsibility to help our clients act on smart decisions — many times requiring them to accept that no one can know market values, say, next summer. That reality increases the importance of other financial choices. The biggest determinant of ultimate success in meeting financial objectives will not be returns, but behavior.

Taking the focus off the factors we cannot control and moving it to the things we can is actually empowering. It requires robust communication and periodic reassessment.

By providing regular and consistent messages emphasizing the importance of behavior in building a secure financial future, we promote lasting and appreciative client relationships—and lower our own stress as well.

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Marilyn Capelli Dimitroff is president of Capelli Financial Services, Inc., in Bloomfield Hills, Michigan and has been a CFP® since 1982.

She currently serves on the Retirement Security Advisory Board of the Financial Services Roundtable. She was 2009 Chair of CFP Board’s Board of Directors and served as Chair of the Ethics Task Force that developed CFP Board’s updated Standards of Professional Conduct.

She has a bachelor’s and master’s degree in mathematics from Michigan State University and Eastern Michigan University, respectively.

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