Rules of the Game: A Portfolio Compass

 | Nov 29, 2013 | 1:00 PM EST  | Comments
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This isn't a typically financial planning forum, but it's a holiday, so what the heck? I'll bust out with a planning-themed column to celebrate. I'm not going to regurgitate the tired old advice about budgeting and staying out of debt.

But I do want to say something about the need to think about objectives and goals. Let's start with a simple question: Why do we invest? If you said, "To make money," then I'm going to put on my best Alex Trebek impersonation, and, "Sorry."  We invest so we can have assets to fund tomorrow's consumption. Forgo a cheeseburger today, and you can have two tomorrow.

Did you notice anything? What was missing? There was no mention there of whether Apple (AAPL) is a good stock, or whether it's too late to get into the Twitter (TWTR) IPO, whether MLPs are the best vehicles for income, when the S&P is due for a correction, blah, blah, blah.

None of that has anything to do with the income you need when you are no longer working. It's all a diversion.

Since I've been working with people to plan their futures, rather than just pick some sure-to-win stocks, I have gotten a glimpse into some of the characteristics that prevent people from succeeding financially.

Just to reiterate: "Succeeding financially" means achieving your desired outcome in terms of lifestyle and necessary income. Not a so-called "winning" trade.

What are some of those characteristics? Being in denial about one's actual situation is at the top of the list. I met with a guy recently with three adult children living at home, as well as a grandchild. He complained about his wife's spending, but he was a full contributor to the household's chaos. He was hoping that he could trade his way out of the family's regular financial shortfall.

That's not a plan, because there is still no cohesive effort to get the chaos under control. In fact, he's adding more chaos to the picture, by wishing and hoping that he'll find the next [fill in the name of your favorite stock gainer here].

We all know what will really happen. The family will keep spending, there will be no plan and he'll become more anxious over time, as he tries to find those magical trades that will bail him out.

I know it sounds harsh, but interestingly the ones who most often become offended are those with a trading mindset. Fewer people with an investing mindset are surprised by the idea that a portfolio should be constructed to meet desired outcomes.

A plan is not a budget. It's not something that locks you into spending habits that don't suit you. In fact, it's the opposite: It's a compass to guide you toward the lifestyle you desire. Your investments should then be structured with risk and return profiles that match the outcome you want.

Expected returns and inflation rates need to be taken into account. Otherwise, making a bet on Apple or some inverse ETF is pretty much akin to putting your savings on Number 7 on the roulette wheel at Caesar's. Except that a no-pressure game of roulette is a lot more fun.

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