13 Dec 2019 A House Divided

If it is not clear to you, in 2019, that humans are tribal creatures, then I would suggest you tour an elementary school, which I have done twice in the last two days on behalf of our rising-kindergartner. These people are tribal! They gather into enclaves, and the enclaves form similar opinions on issues and ask the same sorts of questions as the other people in their group, and even start to dress the same.

Of course I am talking about the touring parents of prospective kindergartners, but I suppose even the kids themselves show tribal tendencies at the ripe age of 5 (how could they not with the examples in front of them!).

Tribalism is no stranger to the world of finance and economics. Some days it feels like the field we work in actually invented tribes. But today I want to look at something that, if it can be considered tribalism, is certainly a subtle form of it. It’s the tendency many folks have of separating investing and financial planning and focusing on one instead of both. I think that’s dangerous.

While I see many people treating investing and financial planning as two separate animals, I believe they’re really two processes within a single animal. Taking the metaphor a step further and applying it to humans, I see investing as a key part of our nutrition–what we take in to fuel our bodies. And I think of financial planning as akin to exercise–what we do (or don’t do) with our bodies.

The thing is, you can’t really separate diet from exercise. They are, despite having on their face almost nothing in common, basically inseparable. Trying to separate them and preference them is likely to lead to unhealth and frustration, and I think the same consequence will follow the separation of investing and financial planning!

On the one hand, those who focus only or heavily on investing but neglect their financial planning process are like those who would focus on eating a healthy diet but never get off the couch. Here’s what would happen:

• You wouldn’t know what you’re capable of. What you eat is meant to propel your body to action. If you don’t get off the couch and try something, you’ll never know what you would have been capable of. Same thing with a focus on investing without financial planning! You may amass wealth, but to what end? The money doesn’t mean anything except what you make it mean, and you can only do that with intentional planning.
• You could miss out on opportunities. If you don’t actually use your muscles, they atrophy and you lose out on their former potential. If you invest well without a financial planning process you could very well work five years longer than you wanted or needed to, simply because you didn’t know what was possible. The problem is you can’t get the five years back. You can’t go on the trip or give the gift or change the career sooner once it’s already later.
• Your “healthy diet” could change without you knowing. As we age and our health changes, what constitutes a healthy diet often changes. But if you stay on the couch, you’re more likely to keep eating the same old thing (even if it used to be “right”!). In the same way, good investing is not the same for everyone. As you age and begin to rely on your invested assets to start funding goals, your “diet” (or asset allocation) often needs to change. The problem is, you might not know this until it’s too late, unless you’re engaged on the planning side of things.

On the other hand, what about focusing on the planning process at the neglect of investing well? That’s like those who exercise regularly but eat a bunch of junk food. Here’s what that would look like:

• You’d limit what you’re capable of. In high school we used to eat fast food before every single away basketball game (this was a different time). Before tip-off we were already reducing the peak performance of our bodies. Same with investments which are too expensive, too risky, too tax-inefficient, too complicated, too active. From the word “go” you’ve reduced what is possible in the planning process you’re engaged in. And just like with junk food, these detrimental investments can offer a great deal of short-term satisfaction and are hard to say no to.
  • An aside here: Sometimes it’s not really junk food, but food that could otherwise be healthy but has too much salt. An investing equivalent of this would be all the S&P 500 funds that have expense ratios ten times higher than they should be (see below).

• You could hijack the planning process. Again, diet and exercise can’t really be separated. What that means is, if you insist on eating poorly enough, long enough, your poor diet can easily work to decrease your desire to exercise, creating a negative feedback loop that spirals quickly. In investing this can happen when a person becomes infatuated with investing such that they begin over-trading or simply spending too much time and energy fretting over their portfolio. This type of detrimental investing behavior can make people lose interest in the financial planning process because it isn’t as “exciting,” despite it being absolutely integral to their financial health.

Here’s my point in summary: A well invested portfolio over a long period of time without any planning in the interval will lead only to an account balance and a whole lot of unknown opportunity and question marks; great financial planning habits combined with poor investment decisions will lead to limited possibilities and can even completely derail what you’ve worked hard to accomplish.

Which begs the question, why not do both well?