Winter 2013 2

The Easy Way Out

by A. Scott White, CFP®, ChFC, CLU

It is only human nature to look for the easy way out of difficult decisions. Consider the case of a widow whose deceased spouse made all the investment decisions. Facing an environment of historically low interest rates combined with the highs and lows of stock markets, she must decide for the first time how to invest the family fortune.
Decision-making dynamics are a factor. Decisions can seem difficult because our emotional state may lead us to one conclusion, while the logical facts surrounding a decision may lead us to a different conclusion. This conflict creates stress and anxiety. While most of us may believe we can put our emotions to the side and let logic prevail, studies continue to show that people make their most important decisions on emotion, then try to support them with logic.1
Decision-making anxiety can be compounded when we lack the experience, knowledge or understanding of a subject to form a logical determination. Let’s consider our example of a widow with little investment experience trying to make an investment decision in today’s turbulent market environment. Often she will chose one of four paths in reaching this decision.
She may do nothing, not making any decision at all. She may pass the investment decision off on others by saying, “Just tell me what to invest in,” relieving herself of the guilt that can occur by making a bad decisions. She may educate herself so that she can make a decision she can live with, right or wrong, what I refer to as “Become the Expert.” Or, she may hire a competent person to help create a plan to tackle difficult investment decisions, what I refer to as “Hire the Professional”.
While doing nothing may seem like the easiest way out, it can also be the most costly. If our widow leaves her money in a savings account earning less than the inflation rate, she is losing purchasing power. Simply “hoping for the best” is not an investment strategy.
Asking someone else is not an investment strategy. Deferring the decision to others may involve asking adult children by saying, “Just tell me what to invest in.” And while her children may have no better idea what to invest in than the widow does, they do not want to disappoint her. Maybe the widow defers the decision to the family’s stock broker and ends up buying whatever particular investment is being sold that day. Or perhaps the widow remarries in hopes of returning to a life where someone else makes the investment decisions. But is the new spouse going to make investment decisions in his own family’s best interest, or in the widow’s family’s best interest?
Perhaps the widow may try to become the expert herself. She may read a number of “How to Invest” books, consult periodicals such as The Wall Street Journal, Barron’s, or Investor’s Business Daily, and watch the financial news networks to gather just enough information as to allow herself to make a decision she can live with.
In the struggle between an emotional decision versus a logical decision, we humans are wired to make decisions based on emotion and then try to justify them with logic. This can be very costly when it comes to investments.
A recent study showed that the average investor in stock mutual funds has an average return of 4.3%, while the average stock mutual fund has a return of 8.6%.2 Perhaps the average investor believes one should always be invested in a a mutual fund that outperforms its peers in the prior three years. But that strategy is not sound, because 95% of the top mutual funds have historically underperformed three years in a row.3 It’s no wonder that it is so difficult to do it yourself.
Hiring a professional can reduce the emotion involved in the decision-making process, and creating a sound investment strategy can be critical to developing a sound financial plan. Though this process may not be simple, it is often the easiest thing to do in the long run.
A comprehensive financial plan developed with the help of a competent financial planner will address how to invest the family fortune, and much more. It will prepare a family financially in terms of their likelihood of saving, investing, and managing debt, giving them more confidence in managing their finances. While higher income households are more likely than lower income households to plan, 81% of family decision makers have a limited plan or no financial plan at all.4
The bottom line is no one can predict the future. We cannot control what will happen. We can only control how prepared we are for what may happen. So my advice is to spend some time finding a competent financial planner to assist you in creating a written financial plan.
How do you find a competent financial planner? You may want to start by asking your other current advisors, like your attorney or CPA, for referrals. Ask if the financial planner is certified or not, and if the financial planner will work as a fiduciary, requiring him to put your best interest ahead of his.
How much education and experience does she have in writing financial plans? Does she seem honest to you? Does she speak in terms you can understand? And finally, work with someone who talks about important things like commitment to helping you, follow up, and execution of strategy.
So if you really want to take the easy way out, spend some time hiring a professional. You many spend more time and money reaching your financial decisions, but sometimes it is a lot easier to make a correct decision the first time around than to go back and fix problems caused by poor decisions.

1 Descartes’ Error, Antonio Damasio 1994.
2 Quantative Anaysis of Investor Behavior, Dalbar Inc. published March 2013.
3 Davis Advisors. 150 mangers from eVestment Alliance’s large cap universe whose 10 year gross of fees average annualized performance ranked in the top quartile from January 1, 2003 to December 31, 2012.
4 CFA and CFP Board undertook the research with assistance from Princeton Survey Research Associates International (PSRAI), which surveyed a representative sample of 1,002 financial decision makers nationwide from April 12 to 24, 2013.

There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices generally rise. The information contained in this report does not purport to be a complete description of the securities markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing materials are accurate and complete. Any opinions are those of Scott White Advisors and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date subject to change without notice. Past performance may not be indicative of future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Strategies discussed may not be suitable for all investors. Investing involves risk and investors may incur a profit or loss regardless of strategy selected. Diversification does not ensure a profit or guarantee against a loss.