Avoid Unforced Errors

Avoid Unforced Errors

by Thomas L. Hardin, CMT, CFP Chief Investment Officer, and Susie Keaton, CPA Tax Manager, Greenwalt Sponsel & Co.

What do you think of when you hear the words financial plan? In most cases, the financial planning process starts with you gathering your financial documents into a big pile on the kitchen table. You have your last four years' tax returns, wills, trust agreements, insurance policies, asset and expense records, and other financial documents. Then you haul it all to your advisor's office, where you spend several grueling hours filling out an extensive questionnaire. The process is exhausting, and very little of it has anything to do with you or your personality; it's mainly about your finances.

Eventually, you receive a neatly bound booklet with your name on the front and about 100 to 200 pages of financial reports, depending on your net worth and how large a fee you're willing to pay. Your booklet includes a cash flow analysis, tax projections, net worth statements, estate plans, and a host of computer-generated projections. If you're like most people, after two or three meetings with your advisor you probably put the book away on a shelf someplace and take it down a few years later, only to learn that little, if any, of the information is still relevant.

That's because long-term projections don't work. They rely on factors that are difficult to predict - things like market returns, inflation rates, taxes, government benefits, health considerations, and job changes. Being off by as little as 1% in just one of those areas can make a 50% difference in the eventual outcome.

Not only are the projections unreliable, but traditional financial planning tends to be a one-time activity. Normally, you're given an annual review, which requires additional fees, centers around products the advisor wants to sell, or both. If any attempt is made to measure the progress of your financial plan, it's usually done through benchmarking - comparing your progress to some combination of market indices or long-term projections. Even if you beat the benchmark, there's no guarantee that you'll be financially independent or meet the goals you set for your life.

Traditional financial planning is mostly about numbers and very little about your life goals or objectives. In most instances, it's nothing more than a financial report that forces you to address a host of issues you aren't particularly interested in. I believe it's much more important to get a clear picture of where you are today. Yes, you need to keep an eye on the future, but your focus and activities should center on the present.

Everyone has financial issues that need to be addressed in the short term. Procrastinating and failing to address them has cost people millions of dollars. For example, you probably know that putting all your 401(k) money into your employer's company stock defies the principles of diversification, but you may have done it anyway because it was easier than figuring out what to do instead. Losing your retirement money because you made a big bet on one stock is an unforced error, and if you do it, you have only yourself to blame. (Even AT&T dropped more than 85% from its peak. If an 85% drop can occur in Ma Bell, the consummate widows and orphans stock, it can happen to any company.)

Here are a few other examples of unforced errors. You know you should check the adequacy of your insurance coverage, but who takes the time? Estate planning is another overlooked area. Unfortunately, many areas of our personal finances have no plan. Many times weaknesses are not apparent until something goes wrong.

To help our clients avoid these kinds of unforced errors and maximize their financial fitness, we've developed the Wealth Management Benchmark (or WMB), a revolutionary new tool for evaluating your current status and letting you determine where to go from here.