What You Should Focus On
This sketch from the great writer and financial advisor Carl Richards (www.behaviorgap.com) has always struck a chord with me. Way too often we all tend to focus on the wrong things in life. Whether it’s in your personal life or your work life, we could all benefit from taking a step back sometimes to think about where our focus should be.
January is a time of reflections and resolutions. We look at the past year to see how we did and make promises to do things better in the coming year. We have annual meetings with our investment clients this time of year to review their portfolios and to see how their individual investments performed. It’s important to have these annual meetings and to monitor the performance of your portfolio, but sometimes we all put too much focus on these performance numbers.
Look back at the image above. Does it matter what your portfolio returned last year? It does a little bit, but really it’s the long-term return that matters. Can you control what your portfolio did last year? Sure you could have invested differently and possibly earned a greater return, but you could have just as easily performed worse. Unless you knew exactly what would happen in the markets, you really had no control over those returns.
So what do I think you should be focused on when it comes to your personal financial situation? I believe the two key pillars to financial success are Saving and Spending. Both of these actions are critical and controllable aspects of your financial plan, yet most people spend way more time focused on their return numbers than what they saved and what they spent.
Perhaps that’s because it’s so much easier to look at our portfolio returns and to compare them to some benchmark. If we aren’t doing investment monitoring for you, you can probably get your return numbers from your brokerage firm, or from one of the many financial websites out there. And you can turn on any news station or go to any news website and you will likely see how the S&P 500 or Dow Jones Average are doing and compare that to your portfolio.
Maybe we just need to come up with a better way to analyze what we save and what we spend, then we can focus on these more important behaviors more. Here is how I would think about your saving and spending and how to review them each year:
Savings Rate - If you haven’t retired yet, then you should be saving for retirement. There is no easy benchmark for this because what you save is dependent on where you are in life. Some will say you should save at least 10% or 15% of your total income but I think instead you should focus on what you save this year compared to last year. If you saved 9% last year, aim for 10% this year. If your savings rate decreases, figure out why and try to improve next year. It’s a simple way to benchmark yourself and can make a real difference.
Drawdown Rate - If you are retired, you likely aren’t saving anymore and you are now taking money out of your portfolio to live on. There are numerous studies on what your “initial withdrawal rate” should be, or what you can take out of your portfolio in that first year of retirement based on the value on that date. I think this is a number you should review each year to see if it increased or decreased and why. Is it due to changes in your expenses or portfolio value? Do you need to make any adjustments to stay on course?
Personal Inflation Rate - We often hear about inflation, typically measured by the Consumer Price Index. But why don’t we calculate what our personal inflation rate is? Sure the CPI is important and to an extent it will impact what our own personal inflation rate is, but we also tend to increase our spending much higher than just what increased prices would indicate. As our salary rises we often let our expenses rise with it. This can lead to a very high and unsustainable expense level in retirement. So look at what you spent each year and compare it to what you spent the prior year. If we can monitor and manage your inflation rate throughout your working life, you will be in much better shape for retirement.
Are you monitoring any of these numbers? My guess is probably no. In fact most people have a hard enough time just figuring out what they are spending each year. But with all the technology available to us these days it’s becoming easier and easier to track that. And even if you don’t have want to use the technology, you can just do a rough calculation by figuring out what your net pay is after taxes, then subtracting out what you save. The rest had to have gone somewhere, right?
So as you sit down and look at your portfolio at the beginning of a new year, maybe you should start focusing on some more important numbers. Figure out what you are spending and what you are saving. Look at it each year and see how it compares. We help many of our clients monitor their spending and saving each year and believe it’s an integral part of comprehensive financial planning. If you’d like to discuss how we can help you with this, let us know!
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.
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