How to not screw up your investment plan…

investment plan

Don’t get emotional.

As humans our biology often works against us by getting in our way of our ability to assess risk.  In times of stress and uncertainty our decision making process is often compromised, and as a result we rely on our gut feelings and our own judgment to make decisions.

Want a good example? Check out the video below (it will take you to YouTube). You may or may not be a sports fan, but you probably remember hearing about the terrible decision the Seattle Seahawks coach made with the Super Bowl on the line two seasons ago.

Needing a touchdown to take the lead with 20 seconds left in the game, Seattle was on the New England 1-yard line. Instead of leaning on the strength of their offense by running the football, they decided to throw a high risk pass which turned into an unfortunate game winning interception for New England.  When asked the reason why?  The Seattle Coach said it was a “judgment” call.

This “judgment” call is no different than our emotions and feelings guiding our investment decisions.  For example, when certain asset classes in our portfolios are outperforming others, we often feel the urge to move all of our money to those hot investments – taking unnecessary risk and potentially screwing up our investment plan!

How can we build a system to cope with our own emotions in making financial decisions?

The answer is not investing in complicated annuities or surefire “guaranteed” investments – but instead creating a policy driven process to help us make decisions. At Upswing Advisor, we use what’s called an Investment Policy Statement to place an investor's goals at the forefront of a structured decision making process.

To elaborate, an Investment Policy Statement establishes the investor’s expectations, objectives, risk/return profile, time horizon, and guidelines for the assets that are to be invested in the portfolio. It goes as far as to outline the investment philosophy, management procedures, and appropriate asset mix to achieve the investor’s goals and objectives.

Would the outcome have been different if the Seattle Seahawks coach, Pete Carroll, had a system in place to cope with the decision making process in such a high pressure situation? We will never know for sure. What we do know is being prepared and having a flexible process in place to cope with all different scenarios is critical to the success of any plan.

Don’t make a judgment call with your investment portfolio. Here is a list of steps to take in building an Investment Policy Statement:

  1. Assess your financial situation by identifying your goals and needs.
  2. Determine your tolerance for risk and your time horizon.
  3. Set long-term investment objectives.
  4. Identify any restrictions on the portfolio and its assets.
  5. Determine the mix of asset classes appropriate to maximize the likelihood of achieving the investment objectives at the lowest level of risk.
  6. Determine the investment methodology to be used with regards to investment selection, rebalancing, buy-sell disciplines, tax loss harvesting, and asset location.
  7. Implement the decisions.