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Vacation planning principles apply to your financial journey

The 6th Mistake

“Imagine that you had to drive from NYC to Los Angeles. You’re in downtown Manhattan hopelessly stuck in traffic. Bicycle messengers are whizzing past. You jump out of your car, sell your car on the spot (at a ridiculously low price), buy a bicycle, and continue your trip to the West Coast.

As absurd as this scenario sounds, investors do it every day when they make short-term decisions for long-term journeys. Stick with a vehicle that will take you to the end of the road.” -Don Connelly

If Peter ever elects to put out a second edition of The 5 Mistakes Every Investor Makes and How to Avoid Them[1], I’d like to request he include Number 6: Mistaking the Vehicle for the Destination. When was the last time you planned a family vacation strictly by the mode of transport? Shouldn’t this only be considered after you decide where you want to go? Why is it that so many investors follow this backwards procedure when it comes to making investment decisions?

Like many other money missteps, my first inclination is to look back into the flawed history of the client/advisor relationship. The backbone of this relationship has always carried a “what have you done for me lately?” vibe, slowly evolving from stock picking, to mutual fund picking, to asset allocating, to the Frankenstein’s monster consisting of all the above. With this at the core, the measuring stick for success rests solely in the performance section of investment statements. This is how the risk-adverse Grandma winds up with all her money in tech stocks. The door opens to habitual tinkering, market timing, trend chasing and overtrading. Who does this benefit? Shocker: not the investor.

The Similarities Between Travel and Financial Planning

The solution to correcting this mistake could be to reframe how we approach the subject. I’ve always enjoyed the similarities between travel and financial planning. Objectives, goals, timeframes and budgets are interchangeable phrases in both practices. Despite having much in common, we are quite good at one and not so great at the other[2]. What if we applied our travel process to a slightly more important task?

Begin with the destination[3] and work backwards. The destination then influences the travel dates (helpful tip: Try not to visit NYC in February as it is by this month that the winter has shattered our spirits and residents are no longer friendly) along with potential costs. Voilà, we are ready to select how we are going to get there.

What does this have to do with money? Simply put, investments serve as the vehicles to take us to our chosen destination. Just as a trip to the neighboring town would most certainly involve different vehicles than an excursion to a remote island across the globe, planning for an imminent down payment on a home requires different investments than a goal twenty years in the future, such as retirement.

Perhaps with a better understanding of the vehicles available, we may be less likely to hastily trade in our cars during the next traffic jam. Let’s focus on some of the different ways to get from Point A to Point B. Doing my best to avoid financial jargon, what follows are a few major asset classes and what I consider their comparative vehicle.

Cash

Vehicle: Bicycle

Every individual should learn how to use this vehicle before progressing to other options. Super-efficient if traveling a short distance but increasingly inefficient the further you need to go. Can be useful to decrease stress and blow off steam in times of heightened uncertainty. Requiring a continuous blend of stamina and strength, it’s by far the most physically demanding vehicle. Favored by those who value control (or the illusion of it) above all else. Long history of failing to keep pace with surrounding vehicles. Proven time and again to be riskier than believers are willing to accept (for additional perspective, see Cash is King?”) [4].

Stocks

Vehicle: Airplane

Most efficient vehicle for long distance travel, not suitable for short. Ideal for individuals who function well without the need to be in control. Has the potential to be very expensive if not properly selected. Requires discipline and a strict following of rules to be successful, while cutting corners can bring about disastrous conse