John Bogle, founder of the Vanguard funds, often recalls a conversation he once had with an advisor. The advisor had a series of meetings with a client to discuss the client's portfolio. The client asked the advisor what should be done in light of recent news. The advisor responded "nothing." Some time later, the client asked again, "In light of recent news, what should we do?" The advisor responded, "Nothing." Frustrated, the client said, "Every year, you tell me to do nothing. What do I need you for?" Bogle told the advisor to say, "You need me to keep you from doing anything."
Bogle's point is that action for action's sake could result in more harm than good. He did not mean that it's advisable to set an investment allocation and then forget it. An important tool we use to set and periodically review an allocation is the Investment Policy Statement, or IPS.
An IPS establishes a clear understanding of investment guidelines, created in a rational setting, which will enhance consistent, disciplined, and prudent management. Having clearly established guidelines reduces the probability of impromptu and detrimental changes. Without an agreed-upon IPS, changes are more likely to be driven by emotion and not logic. It's why most investors don't capture the actual returns of the mutual funds they own. They jump in when markets climb and jump out when they fall. This is a recipe for underperformance.
Having an IPS that weighs an investor's risk tolerance and risk capacity, and that calls for rebalancing asset classes when they fall outside predetermined bands, provides discipline vital to successful investment management.
Our job as investment advisors falls within our broader role as financial planners. We explain to clients the role and the limitations of investment management in the achievement of goals. Too often investments are overemphasized while other areas in personal financial management are neglected. In thirty years of business, we can confidently say that not one client's financial plan has ever failed because investment returns have not been high enough. On the other hand, quite often we have seen financial planning fail when there is a lack of savings discipline, or when lifestyle spending exceeds available resources.
The Serenity Prayer of St. Francis of Assisi opens as follows:
"God grant me the serenity
To accept the things I cannot change;
Courage to change the things I can;
And wisdom to know the difference."
These powerful words have helped many people face life's day-to-day challenges. They can also help explain the role of financial advice.
Once a portfolio is carefully constructed, in harmony with an appropriate risk level and designed to sustain a reasonable lifestyle, reacting to the latest noise in the world can be counterproductive. Better to concentrate on areas you can control, like savings discipline, multi-year tax planning, asset protection planning, and retirement accumulation and withdrawal strategies.
May you have the courage to change the things you can and accept the things you cannot.
Vincent Schiavi, certified financial planner and certified public accountant, is founder and president of Schiavi + Dattani, formerly Schiavi + Company, Delaware's first fee-only financial planning firm. Worth Magazine selected Mr. Schiavi several times as one of the top financial advisors in the country. Mutual Funds Magazine recognized him as one of the top 100 financial planners in the country in 2002.
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