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The Real Financial Planning Pyramid

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The Real Financial Planning Pyramid

When it comes to pyramids, it’s easy to become turned upside down. Such is the case with the infamous food pyramid proffered by the government’s nutritional “experts”. This is also the case with pyramids that depict what matters most in our financial lives.

For investors who follow “advice” from brokers, their Imaginary Investing Pyramid might look like this:

Investing Pyramid

With specific investments and investment returns as the foundation, these wayward investors are in a constant whirlwind, always searching for ways to maximize returns with increasingly complex investment products. In reality, this is a fool’s errand.

Instead, the Real Investing Pyramid looks like this:

Real Investing Pyramid

This pyramid has a foundation based on the overarching purpose for the investing activity in the first place…a goal. This goal is followed by a plan for what needs to happen in terms of saving/investing in order to achieve the goal. Overall investment allocations, behavior, and specific investments round out the list.

Goals Versus Plans

We talked about the difference between goals and plans recently and these indeed are of primary importance to our financial lives. Goals and the plans that support these goals are inexorably linked. The planning actions that flow from these are the resulting output. The broad asset allocation for your savings comes next since this sets the ‘speed’ at which your invested funds travel toward your goal. Settling on the right ‘financial speed’ of course should take into account your emotional ability to withstand short-term price volatility. If you pick a speed/allocation that is right for your goal but wrong for your emotions, your emotions will unravel it every time.

The emotional part, the behavior part is where most investors falter. I’ve seen investor surveys where more than 90% of the individuals expressed their belief that emotions had little to do with their financial decisions. That might help explain why about the same percentage of investors fail to achieve their main investing goal. Behavior is the glue that holds plans together. Good behavior keeps you from translating normal day to day ‘shallow risk’ into permanent loss of invested principal. Markets don’t create these risks…individual investors do. Bad behavior has a cost.

Look Beyond the Shiny Objects

That brings us to the smallest segment of the Real Investing Pyramid, individual investments. While this is often the area of highest focus by individual investors, that emphasis is seriously misplaced. This is not to diminish the importance of using long term market evidence as a guide, but is meant to reorient the primary focus away from “shiny object” investments. Simply put, there are no magic investments that reliably solve all your financial ills without some type of sacrifice or trade-off.

An estimated 11 million bits of data travel across our brains every second but we can only process about 40 bits of data per second. What we focus on really matters. Emphasize what truly matters to your financial life and de-emphasize everything else. Start there.

Related: Do Investors Who Stay in Their Seat Do Better?

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