Happy New Year! 2020 was obviously tough on so many of us. Here’s to hoping you’re able to find some positive moments to reflect on over the last year, and that 2021 brings you health and happiness. Like so many people this time of year, I have decided to try my best to lose a few pounds and improve my physical health. The method I have chosen is a weight loss challenge with some of my closest friends. Four of us put up a small sum of money and agreed to track our weight daily. The most successful, as defined by a percentage of weight loss, at the end of the term takes the pot and more importantly bragging rights. I’ve only just begun, but the exercise got me thinking of two of the more important things needed to realize a successful weight loss program, or financial plan – discipline and accountability.
Discipline can take many forms. In the context of weight loss, I must be disciplined about my food and drink choices and have the discipline to exercise on a more regular basis. In the context of a financial plan, I think there are three main areas of discipline to consider – Saving, Spending and Investing.
Discipline in savings may mean different things to different people. A lot depends on your financial goals and life stage. In my case, I save monthly in a cash savings account, an investment account, a 529 plan for my kids’ college, my 401(k) plan for retirement, and my HSA plan for healthcare expenses. Each form of savings serves a different purpose, but all require the discipline to put the money away, forget about it and move on. I utilize a direct deposit or automatic transfer in all cases so that I don’t have to remember to take action, and more importantly so I don’t consider the money “spendable”.
Saving and spending go hand in hand. Usually, people who find themselves in major financial trouble get there by spending too much and living beyond their means. They take on debt or get used to a lifestyle while things are going well that they can’t support when income is reduced. In our working years, this might mean a smaller house, a less lucrative vacation, or going out to eat less. For those in retirement years, it means sticking to your spending targets so that you don’t risk outliving your money. A monthly budget or cash flow analysis are helpful tools to make sure you have a grasp on spending levels and are within the means of your income and savings. Above all, having a plan and sticking to it will often lead to good results.
Chip wrote a great blog last week that addressed what I think is the third form of planning discipline – investment discipline. Chip asked the readers how they reacted during the market turbulence of 2020. We know from studying the history of markets that staying invested is key to long-term success. If we try to time the market we must not only know when to get out but also when to get back in. Making both decisions at the right time with any sort of consistency is impossible in the long run. This chart shows the impact on overall returns of missing the best market days.
*See disclosures below
It is not uncommon for some of the best days to be sandwiched in among bad days during a period of high volatility. It is critical to understand your own risk tolerance and have a portfolio designed to support it, so that you don’t feel compelled to sell at the worst possible time.
Investment discipline also means not chasing the latest hot stock or asset class. Selling out of a diversified portfolio and placing a big bet on Tesla may look good in the short-term, but adds far too much risk in the long-run. The same can be said for crypto currencies, or whatever Davey the Day Trader told you to buy. I’m not suggesting these can’t play a role in your portfolio, but any investment should be within the context of your risk tolerance and overall financial plan.
Staying disciplined is much easier when you have someone able to hold you accountable. The peer pressure and daily discussion associated with my weight loss competition makes it a little easier to choose chicken tortilla over loaded baked potato soup for lunch. Our tracking spreadsheet, the agreed upon rules, and sharing of ideas will hopefully lead to more success than if I were on my own with no structure. As advisors, we strive to serve a similar role for our clients. Helping to set reasonable goals, providing tools and analysis to monitor progress, and offering the occasional advice to dial it back, or think twice about putting a chunk of money in that stock your buddy said was up 200% overnight.
In the end a successful diet or financial plan takes a series of good decisions and habits sustained over a long period of time. One day, good or bad, won’t have a drastic impact on the results. Understanding this, and taking steps to control what we can control, while planning for what we cannot allows for the highest probability of success. I don’t know if I’ll win the weight loss challenge, but I know I’m much more likely to lose some weight because of it, and at the end of the day – that’s the goal.
In US dollars. For illustrative purposes. The missed best day(s) examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best day(s), held cash for the missed best day(s), and reinvested the entire portfolio in the S&P 500 at the end of the missed best day(s). Annualized returns for the missed best day(s) were calculated by substituting actual returns for the missed best day(s) with zero.
S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. “One-Month US T-Bills” is the IA SBBIUS 30 Day TBillTR USD, provided by Ibbotson Associates via Morningstar Direct. Data is calculated off rounded daily index values. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.