A recent newspaper column by a financial adviser with a nationally known financial services firm
recommended selection of an investment strategy – aggressive, conservative or something in between –
as the first step in the financial planning process. Then, the columnist said, a financial plan could be
“wrapped around” that strategy.
I disagree. A more reasonable approach puts the planning at the front of the process.
I can’t understand why anyone would choose an investment portfolio before he has a plan. Too often, an
investment strategy is chosen only for its potential to produce attractive returns – to beat this index or that
benchmark. That approach is like recommending that you get in your car and drive as fast as you can,
and then, when you get the chance, try to figure out where you want to go. This is obviously foolish
advice, but, unfortunately, it is also the approach recommended by far too many financial “advisers.”
Think about how what you believe about investing and where you learned it. Most investors have learned
what they know from advertising. This advertising is usually paid for, and promotes the interests of,
producers of mass-market investment products and services – brokers, insurance companies and mutual
fund companies. None of these businesses counts financial planning as its primary product, service or
source of revenue. Rather than an end in itself, financial planning for these firms is a means to an end:
the sale of investment products for profit – their profit, not yours.
Many people approach me for advice about an investment strategy for their Thrift Savings Plan accounts
without requesting, or often even having any interest in, the kind of analysis and planning that should be
the basis for this kind of advice.
Planning should start by identifying, quantifying and timing your life and financial goals. This can be time-consuming and, in some cases, difficult. The objective is to determine what cash flows will be demanded from your TSP account and when they will be needed. Once you have some idea of where you want to be, you can identify the investment strategy that is most likely to get you there.
For example, you may determine that your desired lifestyle in retirement will require that you withdraw
about $20,000 per year, after taxes, from your TSP account, that you’d like to pay for a grandchild’s
college education and that you plan to spend an additional $10,000 per year on travel during the first 10
years you are retired. Factoring in your spending needs and guaranteed sources of income, like a federal
annuity and Social Security, will allow you to translate your needs into a series of annual withdrawals that
your TSP account will be expected to produce during the course of your lifetime.
Any investment strategy you might consider should be carefully evaluated in terms of its ability to support
this stream of withdrawals.
Who cares if your strategy offers a chance to double your money in five years if it fails to provide you with
the cash flow you need to meet your goals? An aggressive strategy may be appropriate to support one
pattern of spending, but unlikely to support another. If your goals include taking large withdrawals from
your account early in retirement, an overly aggressive investment strategy may produce an unacceptably
high risk of failure – that is, running out of money before your goals are met. If your plan calls for a high
rate of spending during later years or you’re intent on leaving a significant estate, an aggressive strategy
may be the only way to get you there with reasonable certainty.
In many cases, the strategy you use will change in response to changes in your plan and the results that
your account produces as time goes by.
Your investment strategy is there for only one reason – to provide you with the cash you need when you
need it. If your strategy isn’t selected specifically for its ability to do this, don’t be surprised if it doesn’t.
Written by Mike Miles
For the Federal Times
Publication April 7, 2008