Investment Management Done Right always starts with one simple question: “What do you want?” Do you want to retire early? Do you want to change careers? Do you want to build a cabin in the woods, or a cottage on the lake? Do you want to take a sabbatical and travel the world for a year? Or two? Or do you just want to make sure that you can live comfortably throughout your golden years?
Whatever your answer, the process of planning – identifying, quantifying, prioritizing and stress-testing your financial goals – is fundamental to maximizing the odds that you, in fact, will get what you want.
Investment Management Done right involves a long, thoughtful conversation about your goals, your prioritization of those goals, and the skillful adjustment of the various “levers of financial freedom” that can help you realize those goals. It is a process of identifying what you value most and finding a path to get there that avoids unnecessary risk.
What are those “levers”? Fundamentally, there are only two: Cash Flow and Risk. Everything controllable in investment planning rolls up into those two variables. Cash Flow is the amount of money coming into or going out of your household, both now and in the future. During your working years, it’s usually positive as you spend less than you earn and save for your retirement (or any other financial goal you may have). During retirement, it’s often negative as you draw from the savings you accumulated during your working years to meet your retirement income needs.
The second lever, Risk, is the price you have to pay to earn a return on your savings. Risk and return are inextricably related and, while you can expose yourself to risk without earning a return, you cannot earn a return without exposing yourself to some level of risk (even federally-insured certificates of deposit carry certain risks). However, not all risks are created equal. There are good investment risks – risks that are often worth taking because they have positive expected returns; and there are bad investment risks – risks that are completely unnecessary or whose associated returns are most likely to be negative. The key, then, is to avoid the bad risks and embrace the good risks – but only to the extent that doing so buys you something of significant value – such as a secure retirement.
Focusing on the two levers – Cash Flow and Risk – will allow you to build a more resilient plan: a plan (and portfolio) that’s built to weather future financial storms and that’s better able to cope with whatever curve-balls life (or the market) throws at you; a plan that can provide you with confidence that you’ll attain the goals you value most, while avoiding unnecessary investment risk.