Do You Have a Plan? Managing Emotions & Discipline - Part I

Jeff Scruton - Oct 01, 2018

Given that we now know that behaviour and discipline are the biggest contributors to a successful investment portfolio, as per our last post, it begs the question - why don't we focus our efforts and attention on those factors that exhibit the biggest weight towards the success or failure of our investments?

It's kind of a catch 22 - managing behaviour and discipline are the biggest contributors, but they are also the same reasons why we focus out attention on the lowest contributors.  It's not our fault - it's no secret that, as humans, we are hard-wired to be emotional beings, get distracted and lack discipline.

It's easier to focus on those factors that just distract us from the stuff that's more important to get right.  Things like security selection and costs/fees - things that get endless media attention, are a much easier target for our increasingly limited bandwidth.  But these things only distract us from what we need actually to get right in order for our investment portfolios to do what they really need to do for us, which I am considering to be "success", for the sake of this communication.

Take, for example, the goal of wealth accumulation - what value do good returns have for us, if we don't have a disciplined strategy for saving money.  It's easier and more interesting to focus on returns, but the reality is that how much we save will have a much larger impact on our bottom line than our investment returns.

So, if we know that managing emotion and discipline is the most important part of investing, how do we do it?

This is the first part of a series of posts, designed to outline to tools available for investors and how they can be applied, in a practical sense, in order to master the most elusive, yet most necessary elements of a successful investment strategy - one that focused on managing emotion and discipline - proven to be the biggest contributor toward investment "success".

As per the topic, the first and most effective tool for managing emotion and discipline is to have a financial plan.

I keep referring to "investment portfolio success", but the reality is how can we actually know what that is, if we don't have a plan that outlines what our hard-earned money needs to do for us, in order to achieve whatever our aspirations may be.

And that's exactly where it starts.  A thorough financial plan should account for:

  • A summary of your goals and objectives, both short and long-term
  • What specifically needs to be done, and when, in order to achieve those goals and objectives?
  • How and when those items, both one time and regular activities, will be executed?
  • Investment strategies for each of the assets that are linked to your goals, eg. kids education, retirement, wealth accumulation, estate planning goals, etc.
    • A game-plan for how your portfolio will adjust to varying conditions
  • What efficiencies can be created to optimize your wealth and be further ahead at each stage?
    • Tax minimization, savings strategies, withdrawal strategies, etc.
  • A plan for risk management
    • Other scenarios that may be possible
    • What needs to be put in place in order to manage possible risks to your plan
  • A plan for tracking
    • When will the plan be reviewed and how will it be monitored?
    • How will it be adjusted when situations change - and they always do!
    • How and when will progress be tracked?
  • Who's involved?
    • Family members, other professionals such as accountants, lawyers, etc.

This may sound like a lot and it is!  That's why it's so common for people to push their own needs to the bottom of the pile and for them to stay there.  

I feel very strongly that the most important part of financial planning is execution.  A plan with out a roadmap for execution isn't a plan and far less likely to be successful.

Problem is people are naturally bad at executing their financial plans on their own, if one even exists.

There's no chance any Olympian or professional athlete, although naturally very driven and disciplined people, would be where they are or "succeed" without a coach that helps them stay disciplined and helps them execute the plan.

That is the exact value we aim to provide - to help people create a financial plan and implement the necessary infrastructure and process to ensure it's execution and ultimate "success".  Again, "success" being the real-life achievement of your goals and objectives, both quantitative and qualitative. 

The ultimate value of a good financial plan is:

  • The ability to be further ahead 5, 10, 20 years from now, than otherwise would be the case.
  • Feeling more comfortable and confident so your time can be spent enjoying life and what matter's most to you.
  • Having a clearer picture and clearer understanding of what's possible.
  • The ability to know if you are continuously on track.
  • The ability to make more informed and rational financial decisions.
  • Simplifying your life.

These values will certainly help us to act less emotionally about financial matters and investing and have far more discipline.  This is what matters most and those values easily outweigh the costs involved.

I'll leave you with a great blog post, from a great resource that shares similar values - A Portfolio is Not a Plan, The Reformed Broker.  It's brief and I highly urge you to give it a read.

If our team can help you create or review your financial plan, or just walk you through our Wealth Optimization Process, please don't hesitate to be in touch to set up an initial conversation.

Thanks for reading and we'll be back soon with Part II of the series.

Jeff, Robert, Ini, Donna & Mike

Dymond Scruton Advisory Group