Money Matters: Why you should say 'show me' an investment plan

David Peartree, The Daily Record Newswire

Most investors would claim they have an investment plan. Probably all investment advisors would claim that they have a plan for their clients. In either case, unless that plan is in writing, it’s fair to question whether such a plan exists.

One of the most memorable lines from modern cinema comes from the movie “Jerry Maguire.” Cuba Gooding’s character tells his sports agent, played by Tom Cruise, that the most important thing he, the agent, can do for his client is to “show me the money.” Don’t tell me, show me.

For investors it should be “show me the plan.” Don’t tell me, show me. Put it in writing. It’s simple advice, but profoundly important. Hope is not a plan, and a vague objective of making money or not losing money is a mere hope, not a plan.

Why have an investment policy statement?
Yes, it’s a roadmap, a statement of objectives and process that you’d expect from any plan. It outlines your approach to making investment decisions. Most importantly, though, it is a risk management tool.

We’ve argued before that investors should focus more on managing risk than on chasing returns (“A practical guide to investment risk,” The Daily Record, July 19). Investors ultimately have no control over investment returns.

Risk, however, is something investors can manage, primarily through asset allocation, diversification, investment selection, and, perhaps most importantly, self-control. A written plan adds much needed clarity, accountability and discipline.

A written plan demands clarity about one’s objectives, strategy and expectations. It imposes accountability by allowing the investor to determine whether investment performance over time is consistent with expectations for the chosen strategy.

For those who work with a financial advisor, a written plan establishes important ground rules for the relationship. An advisor’s recommendations and actions can be evaluated against an agreed upon statement of objectives, strategies and assumptions.

Finally, a written plan imposes discipline by acting as a check on emotions. It challenges investors to stay the course during tough markets, to avoid over reacting to events in the short-term, and to fully justify any deviation from the plan.

This last point is key. It’s easy to rationalize changes from a mental plan of action, but deviation from a written plan demands more robust justification.

What should it say?
Here are three key points, but not everything, a good plan should address.

1. Investment objective and time horizon. This gets at the obvious question, “what are you trying to accomplish?” What’s often warranted but lacking is sufficient specificity. If the objective is accumulation, how much and by when? If the objective is to support retirement spending, how much do you need on an after-tax basis, inflation-adjusted basis? What’s the earliest time you are likely to use the money and over what period of time will you be drawing funds?

2. Return expectations. Many investment plans ignore this issue and implicitly assume that the long-term historical average returns for stocks and bonds, for example, offer a reliable indication of future returns. That assumption is flawed and sometimes dangerous.

The long-term return prospects for various asset classes vary over time. Overvalued asset classes generally present poor return prospects.

Investors working with dated expectations for the market returns of various asset classes are likely setting themselves up to be frustrated and to fall short of their goals.

3. Asset allocation and selection. What asset classes are permissible and which are not? Most allocations will include stocks, bonds and cash equivalents. What about real estate, commodities, limited partnerships, futures contracts or other alternative asset classes? A case should be made before adding any of these other asset classes to an allocation.

What security types or investment vehicles can be used and which are prohibited? You might decide to add real estate exposure, for example, but wish to limit yourself to investments traded on a major U.S. exchange. Real estate ownership through a publicly traded REIT held in a mutual fund or exchange traded fund has very different marketability characteristics than a non-publicly traded REIT.

How to use it
Monitor frequently and reevaluate periodically. A plan is a tool and a tool is of no value unless put to use. Monitoring performance should be ongoing, at least annually. The plan should include guidelines for assessing performance and re-balancing the allocation.

Periodically, though, the plan should be reevaluated, perhaps every several years. Sometimes tools need to be upgraded or replaced. A change in objectives or a change in assumptions may necessitate an adjustment in the plan. Life happens (changes in employment status, marital status, or time horizon) and the world changes (interest rates, inflation, and return expectations for various asset classes).

A well thought out investment plan will help you manage risk and let returns take care of themselves.


David Peartree, JD, CFP® is the principal of Worth Considering, Inc., a registered investment advisor offering fee-only investment and financial advice to individuals and families. Offices are located at 160 Linden Oaks, Rochester, N.Y. 14625; email