Swedroe: ‘The One-Page Financial Plan’

If you’re like most Americans, you may be confused, or even paralyzed, when it comes to developing a financial plan. In fact, most investors I’ve met—including many of those who have a relationship with a stockbroker—don’t have a written investment plan, let alone an overall financial plan designed to incorporate estate planning and risk management (insurance of all kinds) strategies.

 

Carl Richards, my colleague at The BAM Alliance and author of a new book, “The One-Page Financial Plan,” observed that, in his experience, even many people who have a shelf full of personal finance books haven’t created a financial plan—either because they don’t have the time to make sense of all the information in those books or because they feel overwhelmed by the challenge, and all the uncertainty, that can exist when it comes to contemplating the future.

           

If you happen to be one of those investors, Richards’ book provides a remedy to the confusion, as well as a prescription for getting out of the paralysis. In it, he supplies a specific road map, one that will help you to identify what’s truly important to you about money. Richards then guides you through the process of writing that “one-page” financial plan, first by getting you to focus on what I refer to as the “big rocks” in life.

 

Put another way, he helps you determine what you are planning for in the first place. He also delivers needed guidance for having good conversations with your significant other (if you have one).

 

This process allows each half of a couple to identify what’s truly important to them. And as Richards notes through his real-life experiences with clients and friends, and as we often will discover when we have our own good conversations, the things that are important to each of us individually are very different.

 

Making Friends With Uncertainty

Importantly, Richards also teaches you how to deal with all life’s uncertainty. In fact, learning to accept that life is uncertain is the key to the ability to take action.

 

We’re all uncertain about many things, such as how long we’ll live, what rates of return can we expect from stocks and bonds, how much we should be saving, whether we should spend money on a dream car or vacation, how much and what type of insurance we should buy, when can we retire and how much can we reasonably expect to withdraw from our retirement accounts.

 

Of course, many of these questions cannot be answered with certainty because there are many variables and unknowns. And working through these issues will require many assumptions, which will change over time. All that uncertainty is what can cause the paralysis that ultimately prevents so many from acting at all.

 

The solution that Richards offers is to accept the uncertainty: “It’s best to create a financial plan that takes uncertainty as a given—that sets you up to make adjustments as quickly and painlessly as possible so your disappointments won’t spiral into disasters.”

 

By describing many of his own experiences, Richards gives readers the antidote to investment-plan paralysis. He explains that it’s important to accept the uncertainty and understand that financial planning is an ongoing process. Thus, you must accept that your plan will likely go through many revisions and that adjustments will have to be made as life happens.

 

On Being Human

One of the things I like best about the book is that Richards, who is a financial planner, describes many of his own errors—errors he committed despite possessing the knowledge that should have prevented him from making them.

 

He explains how being all too human, and subject to emotional (instead of rational) decision-making, led to the kind of mistakes we, as humans, all make. He explains: “I’ve made mistakes that no rational financial advisor should make … but I’m also human.”

 

 

He adds: “Irrational decisions and bad calls about money aren’t ‘failures’; they’re just what happens when emotional creatures have to make decisions about the future with limited information.”

 

The message is that even a well-trained financial advisor, acting on their own, can be prone to making mistakes with their money. And these are mistakes they would never make when giving advice to their clients. The difference is that, with a client’s assets, an advisor isn’t emotionally tied to the issues at hand.

 

For example, they don’t work for your employer, whose stock you want to load up on. Nor are they emotionally tied to a certain dream house, the one you just have to buy, nor that dream vacation you want to take.

 

The lack of an emotional tie is what allows them to help you make rational decisions. It’s why most of the financial advisors in my firm have another advisor as their financial coach—to make sure their decisions are being made rationally, based on facts and evidence, and not emotions.

 

Make A Plan. Stick To It.

Perhaps the most important lesson Richards imparts is that creating a financial plan, and accepting we cannot predict the markets (and no one else can either), is one of the best ways to give yourself something we all want more of. And it’s the most precious thing we have—time.

 

He related this story: “I have a friend who sat down and calculated how much time he no longer has to pore over financial statements each week. He was shocked to find a whopping four to six hours a week! And not only did he have more time, but leaving his investments alone, he found they were doing much better.”

 

And yes, academic research does show that the less frequently individuals check their financial statements, the better their returns. The reason is that they are less tempted to take action when inaction (adhering to the plan) is usually the better alternative.

 

Conditions For Success

I’m confident that if you read Richards’ book, and follow his prescriptions, you’ll be able to create a financial plan that’s truly aligned with your values. Such a plan will serve as a clear path forward to your goals. After that, the rest is up to you, because having a well-thought-out plan is only the necessary condition for success.

 

The sufficient condition is having the discipline to adhere to your plan. That’s the much harder part, because we’re all human and subject to making behavioral errors. And there are so many we can make. My 2002 book, “Rational Investing in Irrational Times,” covered 52 mistakes.

 

Nine years later, “Investment Mistakes Even Smart Investors Make and How to Avoid Them” was published, and it contained 77 mistakes. If I were to update it again, the list would be even longer!

 

This is why Richards emphasizes the need to behave, and to do so for a very long time in the face of many unexpected circumstances and likely several bear markets. And you’ll have to do it while most everyone else is losing their heads, thinking this time it’s somehow different. With that in mind, he concludes the book with strategies designed to help you stick with the plan, so that you don’t undo all the hard work you’ve accomplished with even one poor decision.

 

Morgan Housel, a columnist for The Wall Street Journal, said: “In a world where financial advice is (often purposely) complicated and filled with jargon, Carl distills what matters most into something that is easy and fun to read. The true measure of a brilliant book is whether the material is as relevant to an industry expert as it is to a layperson.”

 

As the author or co-author of 15 books on investing—including “The Only Guide You’ll Ever Need for the Right Financial Plan”—and the director of research for The BAM Alliance, I found the book just as relevant to me as I’m sure it will be to you.

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Larry Swedroe is the director of research for the BAM Alliance, a community of more than 150 independent registered investment advisors throughout the country.