Chipotle & A Movie
My wife recently took our three children to visit her parents who live a few hours from Houston. My in-laws have retired and live out in the country, and our kids always look forward to visiting. I stayed home to come into the office, but when the first evening with everyone out of town rolled around, I realized I was a bachelor for the first time in a LONG time! So, I did what any dad of 3 with no plans would do… I picked up Chipotle, watched a movie by myself, took the dog on a walk and was in bed by 9:00! While I missed them, it was a welcome break from the normal chaos that our home produces most evenings.
Before they left, Emily gave me a list of a few items that needed to be taken care of prior to her return. I successfully took care of all items on the list except for one item. Little did I know, this was the only time-sensitive item because of the upcoming birthday party we were hosting for our oldest daughter! I failed to manage Emily’s expectations prior to her return home.
In a similar fashion, managing expectations is vitally important to long-term success as an investor (and husband).
Four Dangers of High Investing Expectations
Optimism is a staple of being an American just like fireworks on the 4th of July or eating hotdogs at a ball game. Just as eating too many hotdogs can make you feel sick, high expectations for your investment portfolio can do the same.
Danger #1: Spending more than you can afford – Expectations of high returns year after year can often lead many investors to feel like they have the ability to spend more than they can really afford prior to and during retirement. This can create spending habits that are sometimes hard to change. The hard questions to answer are 1) How much do I need to save prior to retirement? and 2) How much can I spend in retirement? These questions can only be answered honestly with realistic return expectations.
Danger #2: Taking on more risk than you need – Most investors need to take some type of risk by owning stocks, but how much risk do you need to take? Humans are emotional creatures, and if investors are not emotionally prepared for a stock market correction, data suggests that investors are notorious for selling at the exact wrong time (i.e. selling low). Identifying the right amount of risk you need to take is very important as you approach retirement.
Danger #3: Owning the wrong type of stock – Investors who have high expectations for stock market returns will typically be drawn to the stocks that have had recent strong performance. For example, Tesla, Netflix, and Amazon have been some of the top performing stocks over the past 10 years. Buying stocks that are top performers over the past decade can be considered “chasing returns,” and can often be a poor strategy for selecting specific investments.
Danger #4: Not understanding what you own – When investors become fixated on returns, they can lose sight of the fundamentals that drive long-term success. Is the company profitable? Are earnings expected to grow moving forward? Will the company be able to continue their dividend increases moving forward? I am reminded of sound advice for any golfer… If you are focused on shooting a good score, you will never be a great golfer. If you can focus on hitting quality shots and implementing sound course management, the score will take care of itself.
Create & Monitor Your Live Well Plan
Our Live Well Plan encompasses and coordinates ALL areas of your personal finances. The Live Well Plan includes cash-flow projections and allows us to test adjustments in real time to predict your retirement readiness – making sure you are in the “green zone.” Our Live Well Plan will use realistic return assumptions so you do not have to worry about the dangers listed above. In addition to that, we use Monte Carlo simulation which shows you retiring 1,000 different times to provide a more statistically sound answer as to the probability of success leading up to and during retirement.
Establishing You Family Index Number
Your Family Index Number is a personalized measurement developed to define and track the progress of your portfolio as it pertains to your Live Well Plan. This number represents the rate of return needed from your portfolio assets in order to achieve your goals and objectives with confidence.
The Family Index Number replaces complexity with clarity by helping clients understand the rate of return their portfolio needs to earn over a market cycle. Knowing your Family Index Number will not only help you meet your needs but also reduce the stress of trying to outperform a volatile index. Using a Family Index Number will help you determine how to get “there” with the least amount of risk.
Want to review your Live Well Plan? Or maybe you want help identifying your Family Index Number? Give us a call.
About the Author
Matt Price serves as a Partner and Senior Vice President for The Price Group of Steward Partners. He resides in Houston with his wife, Emily, their three children and the family golden retriever. Matt studied at the University of Pennsylvania – Wharton School of Business for his Certified Investment Management Analyst (CIMA®) designation after receiving his undergraduate degree from the University of Tennessee - Knoxville. Over the past 10 years, Matt has helped families make high quality, common sense decisions regarding their wealth and their legacy. Matt firmly believes that everyone needs a wealth coach!
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