Louis and His New TV

Here is this week's blog. You can also find it and others here.

Hello again!   Did you miss me?

75% and 168.   

75%  is how many clients have transitioned so far (42 out of 56).   That means The Financial Zen Group is on rock solid ground.  The significance of this can't be overstated.   The biggest risk in going independent is not enough clients come with you to sustain your business.   

This is no longer a risk for The Financial Zen Group!  So thank you, thank you, thank you to everyone who has already transitioned!

168 is how many hours there are in a week.  The amount of paperwork involved in moving 42 household and hundreds of accounts is no small task.  After the first 3 weeks of my blog, I decided I was doing a disservice to my transitioning clients.   I felt I had a responsibility to these clients to use my 4 hours of writing time each Saturday to process more paperwork.  I committed to stop writing until I was caught up and could feel good about completing other "extracurricular activities."

I'm now caught up.   So let's get back to our regularly scheduled program…. 

Louis wanted a new TV.  His current TV was 7 years old and had seen better years.  So he did his research and he read reviews and he "test drove" dozens of models at home theater stores.  He finally decided on a 65" Samsung Curve.  

Excited and ready to buy, he started shopping for the best deal in town.  He looked online and he looked in stores.  Finally his patience paid off.   A local store had the right TV at the right price.  

It was not on sale.  In fact it was 20% more expensive than anywhere else he found it.  

Not wanting to miss this golden opportunity, he left work early on a Wednesday afternoon and drove as fast as he could to buy his new TV.  He got there just in time.  

The salesperson said the TV was going on sale the very next weekend.  Louis couldn't believe his luck.  He bought the TV immediately.  He got his dream TV and didn't pay a penny less than he had to…

[*sound of a record scratching*]

No, you didn't misread that.  Louis was pumped to pay a 20% premium for his TV.

Huh?  Who in their right mind would WANT to pay more than they have to?

My thoughts exactly.

And yet every day individual investors do exactly that.   Investors consistently buy when the markets are up and sell when the markets are down.   Exactly the opposite of the classic buy-low, sell-high investment maxim.  

A 2014 article in the Wall Street Journal quantifies it nicely:

"A new study finds that the average investor in all U.S. stock funds earned 3.7% annually over the past 30 years—a period in which the S&P 500 stock index returned 11.1% annually…the biggest factor is that investors chase returns—jumping aboard after a streak of hot performance and diving over the gunwales after it goes bad. Because of that buy-high, sell-low behavior, investors in the typical fund have a lower average return than the fund itself."  (full article)

We're wired as human beings to run towards pleasure and away from pain.   This neatly explains they typical investor's self-destructive behavior.  

The solution to outsmarting your emotions is a plan.    "Smart money" (i.e. pension funds, university endowments) don't manage money based on feelings.   They manage money based on a strategic plan.   If they think their plan requires a change, they meet with their investment strategy committee and only after everyone is agreement do they change their Investment Policy Statement and execute their changes.  

That's why you and I follow an investment strategy to manage your money.    We regularly rebalance, harvest tax losses and stay invested regardless of the daily fluctuations.  

Moving forward, we'll take it a step further will put this strategy in writing.   We will both sign a mutually agreed upon Investment Policy Statement (IPS) based on your unique situation and risk tolerance.   If we need to change our strategy, we'll execute and sign a new Investment Policy Statement.

This will add another security measure to ensure we don't make emotional, rash decisions and buy low and sell high, not the other way around.

P.S. We didn't an execute an IPS at Wells Fargo because compliance wouldn't allow it.