Friday, January 22, 2016
Q4 2015 Commentary
Kim Miller, Certified Financial Planner™
“The only person on the plane I have to worry about is me. If I get there safely, then everyone on board gets there safely.”
Tom Schuchat, former airline pilot
“Emotional intelligence is the ability to identify and manage your own emotions and the emotions of others. It is generally said to include 3 skills:
· Emotional awareness, including the ability to identify your own emotions and those of others;
· The ability to harness emotions and apply them to tasks like thinking and problem solving;
· The ability to manage emotions, including the ability to regulate your own emotions, and the ability to cheer up or calm down another person.”
In my practice I frequently encounter emotional responses regarding money. Unfortunately, emotional responses regarding money are generally unhappy or negative emotions: “I don’t have enough money.”, “I’m not going to have enough money to retire.”, “I won’t have enough money to retire comfortably.” “I’m afraid to invest my money – I might lose it!”, “I’m afraid I might end up a bag lady!” and etc. Upon inquiry it often turns out that these unhappy feelings are deep-rooted and manifest themselves the most when “things look bleak”.
Financial advising as practiced at my firm is in two distinct, discrete parts: understanding the present while planning for the future and management of investment capital within the planning framework.
Here are the basic planning steps I take with every planning engagement:
· What are your objectives?
· What resources (known and unknown) do you have to meet your objectives?
· Is there a gap between your objectives and required resources?
· What steps can you take to close the gap?
· Develop an action plan targeting success.
· Like shampoo, rinse and repeat as necessary.
The process is intentionally designed to remove fear of the unknown. The closer we can get to having adequate resources to meet the objectives, the more comfortable we get in knowing that we can “get there”. We have removed – or at least reduced – the fear of the unknown.
I’ve had clients let out audible sighs of relief when they discover they don’t have a gap to fill or that the gap – or other perceived financial shortfall - is easily bridged.
People think they come to financial advisors for solutions, but what they really want is assurance that “it’s going to be alright” or “it’s going to be alright if you follow this list of action items”. They want their emotional feelings about money to be soothed, dampened, made manageable. This is what true financial planning advice provides.
Managing investment capital isn’t much different for the emotionally-intelligent financial adviser. Applying a process provides the adviser and client a framework in which rational decisions can be made and provides a level of comfort for those times when we’d rather run. I often say that the investment business is the only business in which people run for the exits when the goods are on sale. If we have a plan with which we approach the risk of investing, we can rely on that plan instead of relying on our emotions. This works for up-swings as well. Chasing “green arrows” as I call it is as dangerous as running from “red arrows”. Investors who invest with their emotions nearly always end up “buying high and selling low” even when every bit of investment advice ever offered in the history of the world has been reduced to “buy low and sell high”. The emotionally-intelligent adviser knows the difference and is able to convey that conviction to his or her clients. I often tell investment management clients that I earn my management fee not by trading accounts but mostly by waiting. Not panicking in a downturn and selling and the opposite – not panicking in an upturn and buying. If we have formulated our plan and placed our capital accordingly, patience is usually rewarded. Of course, no plan is perfect: sometimes we have to exercise more patience than at other times. It is always amazing to me how impatient people can be, but my response is always the same: “We have a plan and we’re sticking to it”. The corollary to this response is: “If you needed the money next week or next month we wouldn’t have put it at risk in the first place – if your time horizon has truly changed (not changed merely because you are anxious) then we should change your plan”. I remind them that we can always sell and reduce their exposure if they really want to do so, but unless their objectives have really changed, we need to stick it out.
As I write this, the capital markets have declined on nearly every trading day in 2016. “Things look bleak”. I’m keeping in mind what my Uncle Tom Schuchat* said, knowing that I’ll arrive safely, and so will you.
*Tom was an Air Force pilot; flew for Flying Tiger Air and then for Continental Airlines, “the proud lass with the golden ass” as he once said. He was married to my mother’s youngest sister. He died in March, 2013 at age 78 following surgery for pancreatic cancer. He never crashed a plane.