Financial Planner? Market Timing?

In August of 2011, I sent a note out to all of my clients that we were in for a ride with respect to the markets. Since that time, we have seen swings up and swings down and there is no suggestion that the near future will see anything different. Despite all of this, one of the most common questions that I get from people once they learn that I am a financial planner is “So where do you think I should invest because the markets are scary right now?”

There are a few key concerns that I have whenever someone asks me that. First and foremost is the fact that so many people equate financial planner with investment advisor. Although there are some overlaps, the two are not the same despite the fact that so many institutions and investment advisors convey the idea that they are doing financial planning to their clients and to the public in general.

The second concern that I have with the question is that people still insist of investing in funds and behaving as though they are in the market directly. A strong correlation to this is the idea that timing the market is (a) feasible and (b) a smart thing to try and do.

Let me try and educate those who follow me on the above items and encourage you to disseminate these thoughts both verbally and electronically.

It is my opinion that a financial planner is one who spends time looking at each of the following five areas: (1) Cash Flow Management; (2) Risk Management; (3) Tax Planning; (4) Investment Planning; and (5) Estate Planning. Each of the areas needs to be explored in detail, not simply a cursory overview to get to the product(s) that you get paid a commission on. In fact most financial industry people spend no time, or very little time, looking at the prospective client’s cash flow management likely because the compensation in that area is nominal at best. I believe that this is the number one biggest oversight. If you do not know how a person manages their cash flow, how in the world can you suggest they set aside any money versus pay down a debt etc? By spending time reviewing the cash flow management you can learn significant and important items that you would otherwise overlook at the expense of your client’s financial well-being. For example, if your client partakes in ‘retail therapy’ it might be a good idea to know that. Not so that you can lay into the client to stop this detrimental behavior, but to make sure that they accommodate for that in their outgoing funds. If you don’t, then it is far too easy for your client to be credit card hopping without your knowledge and then you are stunned when they call you up because they are going bankrupt – their fault? No it is yours for not having learned that and helped proactively.

Turning to risk management, there are so many different schools of thought on what insurance you should and what insurance you should not have you would never finish reviewing them before you ultimately died. How do you figure out what is or is not for you – simple, find someone who knows the insurance world well and who also knows you well. And if they do not know you well, that they spend time to find out as much as they can about who you are and what is or is not important to you.

Next is Tax Planning in the financial planning assessment. In a nutshell, as a good friend of mine has said before, “It is okay to pay tax, it is not okay to leave the government a tip”. Tax planning is not simply do you set up an RRSP, it is far more intricate than that and as such needs to be addressed either by a tax professional and/or a financial planner with knowledge in that area.

Now we turn our attention to the ‘funnest’ area – Investment Planning. There is no doubt that there are a number of ways to make money, but investment planning should also look at how you keep your money. It is not simple enough to plow all of your extra cash into a piggy bank or against your mortgage. For all financial planning items, doing something in isolation is often the worst course of action.

The final area is Estate Planning. There is still the belief that “I do not need to worry about that because all I have is nothing”. Wrong, this area is not only applicable to little old ladies with million dollar estates. In the same way that it is important to use a tax expert, you should use an estate planning expert and/or your financial advisor.

So now that I have spoken to the importance of doing a full plan, not one part and think you have done a full plan, let’s turn our attention to one of the other fallacies in finance today – namely that timing the ups and downs of the market is a good move.

When someone tries to time the market to get in at its lowest point and out at its highest point, they are asking for trouble in almost all instances. Why?

1. Many people invest in pooled funds (mutual funds, segregated funds, etc.) and those are often not 100% correlated to the market(s) that they invest in so timing the market using funds is inherently an inane act.
2. It is said that professional money managers are wrong two thirds of the time with their calls, the good ones just lose less than they make, when they make a right call. If the pro’s have that batting average, imagine what the amateurs have?
3. One of the issues with market timing is that some of the worst market days are followed by some of the best market days. The problem is that people often jump ship after a bad day and miss getting back in before the good day. In fact, there have been historical reviews that show if you miss the top ten up days in a market cycle you go from making money over the cycle to losing money.
4. It really boils down to the old fable of the tortoise and the hare – slow and steady wins the race.

When someone asks me for a flavor of the month, I usually respond with chocolate chip because that is what I like. Typically I get a quizzical look, a nervous laugh and “No really, what do you think?” My response is always if you need your money in the near future, stay out of the market. If you do not, then jump in head first and go to sleep for twenty years and when you wake up, you will have more money than you put in presuming history repeats itself. Then I suggest that they do a financial plan rather than work in isolation and the discussion evolves from there.