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It's the Planning, Stupid

It's the Planning, Stupid

January 08, 2024

In 1991, President George H.W. Bush held a 90% war-time approval rating.  However, the following year during a mild recession in the midst of an election cycle, Clinton strategist James Carville famously coined the phrase "It's the economy, stupid."  That phrase was used to bludgeon the public with the idea that the bad economy outweighed the military successes of the administration.  And it worked; Bill Clinton was elected the 42nd President of the United States.

I would like to play upon that phrase to bludgeon the public today with a message that needs to be pounded into their heads:  It's the planning, stupid!  Just as Carville wasn't trying to insult the public as much as seize it's focus by calling them stupid, I'm not trying to insult anyone either.  I'm trying to awaken people to a very common misconception.

We have posted some research on our website that makes some very important points.  First, the average DIY investor does a pretty poor job of planning for retirement.  In fact, their returns trail the broader markets by 3-5% over long periods of time, largely due to irrational investor behaviors.1  And yet, relatively few seek professional help in hopes of achieving better outcomes for the last 20-35% of their lives.  One of the main reasons that people choose to go it alone is that they don't believe that a professional could improve their performance enough to justify the fees they would have to pay for that help.  Yet the research doesn't support that idea.

The second key point is that the research shows that working with a competent professional has been shown to increase annual returns by 3-5% net of fees,2 offsetting the underperformance of DIY investors.  This can translate to a 38% increase in retirement income, according to the American College of Financial Services.3

But the third point, and the focus of this post, is that this increase in performance doesn't just come from advisors being able to pick better investments.  There is some lift in performance attributable to professional asset allocation, investment selection and active portfolio rebalancing, but it only amounts to about 1.5% annually.2  On the other hand, competent financial planning can account for an increase of around 2.5% annually through having a formal plan, tax planning, income & distribution management, and behavioral coaching.2  Unfortunately, many who do seek help are skipping the most beneficial component of professional help and only getting investment advice and its relatively smaller bump.  If they were to first seek out a good financial planner, they would likely see the benefit of having a formal financial plan created for a small, one-time fee and get ongoing planning included in the same cost as the investment advice.  In other words, you can pay a small fee one time for a plan and get the greater benefit of ongoing planning and coordination thrown in with the fee for managing your investments.  While this is not an absolute statement and advisors have the ability to structure their fees in a variety of ways, this is a very common experience with those that hire a professional planner.

In light of these facts, why would anyone want to forego the larger benefits when they don't have to?  The moral of the story?  It's not the investing help that makes the biggest difference, it's the planning, stupid!

Asset allocation does not ensure a profit or protect against a loss.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. 

1 Quantitative Analysis of Investor Behavior, DALBAR, ©2023.

2 Putting a value on your value: Quantifying Vanguard Advisor's Alpha®, The Vanguard Group, Inc., ©2019     /     29 C.F.R. 2550 (2011). Regulatory Impact Analysis     /     Your Value is in the Numbers, Russell Investments, ©2023     /     Advice Matters, The       Pacific Financial Group, 2020     /     Advice seekers retire with 79% more money, MarketWatch, May 22, 2014     /     Help in Defined Contribution Plans: 2006 through 2012, financial engines® and AON Hewitt, May 2014     /     Capital Sigma: The Advisor          Advantage, Envestnet PMC, ©2019

3 Retirement Income Process, Strategies, and Solutions, David A. Littell and Jamie Hopkins, The American College of Financial Services Press, 2020.