Wealth Management & Financial Planning

Wealth Management & Financial Planning

Beware of Auto-Pilot Investing

My first airplane ride was in 1988. I remember the anxiety.  It was thrilling! My new bride and I went through security and boarding, got on the plane, popped the Dramamine and held hands during takeoff. The crew efficiently served beverages and 40 minutes later we were back on the ground.

For Barb and me, the plane ride was a seamless experience – same plane, pilot and crew – just a new location upon landing. However, the flight crew experienced the flight in three very different stages. They helped us board the plane and place our luggage before takeoff. They served us a snack at 30,000 feet and finally they reminded us to buckle up for landing.

Similarly, average investors often perceive a similar “seamless” experience when it comes to retirement planning.  Just as location was the only change I perceived on my plane ride, the only change an investor may note is their account balance. When the statement arrives, their eyes drift to the bottom to see how much they have accumulated.  They tend to get caught on auto-pilot without noting the three different investment stages that need to be managed during their journey toward retirement.

Phase 1 is accumulation, where investors save money. Just as a flight crew considers weight distribution during loading, the same is true for investors’ accumulation strategies.  Investors’ primary goal during accumulation is to save the correct percentage of income and build tax diversification. That means the investor’s nest egg shouldn’t all be directed to a 401k plan. The goal is to include tax-deferred, tax-free and taxable accounts.  Investment returns are nice but retirement success comes from tax diversification.

Phase 2 is preservation. Although saving (accumulation) may still be occurring, the amount being invested becomes secondary to preserving the nest egg. This is the only phase where the average investment return truly matters.  Investors need to exercise discipline when dealing with seasons of volatility and resolve to stick with their decisions.

Phase 3 is distribution.  In airplane terms, investors are trying to achieve a safe landing. This phase requires relentless attention to volatility and investors must be aware of the tax treatment on every dollar needed. If an advisor mentions “average investment return” during the distribution phase, investors should end the conversation and walk out because the advisor clearly does not understand math. Taxation and volatility are paramount in landing the investment plan safely.

As investors, we like to think in average returns but markets don’t move in straight lines. When distribution occurs, the withdrawn funds are never replaced in the account. The term “average return” doesn’t take that fact into consideration and as a result the investor’s experience could be much better or much worse than the average return. This reality becomes easy to understand when people invest during stock market pull backs, but it is often forgotten during the withdrawal phase.

There is an art to safely landing a plane just as there is an art to distribution planning.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.

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