We are all familiar with guardrails on highways. They are put there to keep a simple mishap from turning into a full-blown catastrophe. If you go a little off course, the rails help you regain the path towards your destination. Financial planning functions in the same way by keeping you on path towards your financial goals. This is the real substantive value of planning, to keep you from being unintentionally mortally wounded.
Make no mistake, as author William Bernstein put it recently, “you are engaged in a life and death struggle” with the traditional financial services industry. Brokers, bankers, insurance salespeople, etc. are focused almost entirely on creating an emotional response to short-term events usually taking the form of an expensive packaged investment product. When you buy the “best fund from last year” or the “super safe annuity”, you are likely plunging your vehicle over the guardrails into dangerous territory.
Staying on Course
Financial planning starts with the simple premise that the only basis for making investment decisions is within the context of the plan. The plan provides structure and protection from often poor, snap decisions that might take you off course. In many respects, staying with the plan, in good markets and not so good markets, is what produces good long-term results. Planning (and the planner) provide the patience and discipline required to achieve longer-term goals. Investing is simple, except for the emotional aspects, which happen to be incredibly difficult.