I hear a lot about people's investment opinions and in many different venues. Often, it's in an official meeting, but there seems to be something about the bread aisle at Kroger or the sidelines at my kids' sports events that gets tongues wagging about investment tactics. People like to tell me their latest hot investment that they are sure is the next big thing, but I always have one question, "How does that investment fit into your financial plan, or, if you don't have a financial plan, at least your personal Investment Policy Statement?"
Enter the blank stare.
An Investment Policy Statement (IPS) is a document, a paragraph or a sticky note where you write down parameters for how you will save and invest your money. Another thing it can do is keep you from doing dumb things with your money.
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For example, building off last week's column for physicians, maybe a simple IPS would be, "We will save 30% of everything we make with the goal of retiring at or before age 65. We will prioritize those savings into buckets that are tax efficient or eliminate high interest debt. The investments we choose within our savings buckets will be invested in low fee index mutual funds allocated into stocks and bonds based on our age to retirement. We will re-balance our investments annually. Our home can have a mortgage but must be less than 2x our income and paid off by the time we retire. We will avoid high interest debt by saving ahead for big ticket expenses. While we may choose to work past retirement age, we will have the option to stop working due to health or other limitations that could challenge that desire. At that point, we will know we can confidently maintain our lifestyle on 4% withdrawal of our financial assets every year."
Back to those side conversations about investment decisions in the bread aisle -- the problem with them is that they are not part of a bigger comprehensive strategy. Like the Sun Tzu reference, "Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat."
Investment is a tactic, and even a winning tactic can be just a highlight in a failed strategy.
If I were to put together a IPS from the collective tactics and decisions (passively or intentionally) whispered to me, here's what it might sound like.
"We will be auto-enrolled into our retirement plan at a 5% savings rate, with no particular retirement goal in mind. We will buy the first investment that someone has to sell, which will probably be a whole life policy. From there, additional savings and investing decisions will be on an ad hoc basis, prioritized by perceptions of complication (SPACs), sales pitches while on vacation and likely intoxicated (time shares), and social media memes (Bitcoin). Our home is our biggest investment in the future so we will buy more than we can afford to pay. But we will not commit to selling it to be able to retire. Our budget will be paycheck-to-paycheck, and we will be comfortable with paying thousands of dollars in interest from credit card debt that we carry month-to-month from big ticket and unexpected purchases. We fully tolerate concentration of investments and the potential for severe losses and will count on working past normal retirement age to maintain our lifestyle. We choose to not have any health events that could challenge that plan."
Obviously, that's a crazy IPS. It sounds nuts. But, folks, these are the implied IPS's, whether intended or accidental.
Let's go back to our venue, in front of the hot dog buns. You tell me you bought into Bitcoin three years ago and have made a huge return. Great. Did you sell it? No? Why not? Oh, because it's just about $3,000. You only put a small amount to begin with. How much do you make? $150,000. How much do you save into your retirement plan? "I'm not sure --whatever they put me in." How much is in there? "$50,000 the last time I looked." That's not enough. "I don't believe in retirement plans. I can make so much more investing on my own."
That right there is "tactics without a strategy."
The White Coat Investor, a physician who runs a successful financial blog and podcast, has a wonderful description of how to craft an IPS here: https://bit.ly/3jtlO7h, if you aren't going to run a financial plan. He originally wrote his in 2007 and had quite a prescient addendum:
"Any change to these percentages or change in funds used will require a 3 month waiting period. Development of any new asset class or new funds allowing us to invest in an asset class such as international small or international value stocks will require a 3 month waiting period prior to transferring funds."
His prescience was considering the temptations that would present themselves to his future self. Since 2007 he has probably encountered many investment opportunities, and this was his insurance policy to stay the course.
Dr. Bill Yount, a physician in Knoxville, Tenn., runs the Financial Literacy Project on Facebook and works to educate physicians. I asked him what he thought about physicians taking a more active role in managing their finances. His response has still stuck with me. "Financial ignorance is an extremely costly, if not deadly, disease."
For example, I know that for many people "15 minutes could save you $150,000 or more on student loans." There are still physicians, nurses, and employees of non-profit hospitals and clinics who, if they did a little reading or hired a student loan adviser for a few hundred dollars, could spend 15 minutes on the phone with their student loan servicer to switch into the right repayment plan. Student loans are still in covid-19 forbearance with no payments or interest accruing, and every month counts toward forgiveness. Tax free forgiveness.
I sat with a person who thought she was in the right program for forgiveness of her $100,000 student loan debt, only to find out she was in the wrong program that whole time. Because she didn't spend 15 minutes, she will now have to figure out how to start over on a 10-year repayment for forgiveness or figure out how to pay all of it, herself. Ouch.
Dr. Yount is open about the fact that he got a late start, but he now has a 40% savings rate that will allow him to comfortably retire on his own terms. His own IPS keeps him on track.
Another great bit of advice he has for new doctors is to "reverse engineer the map of your financial future. Begin with the end in mind and work 20 for the money and the rest for the joy."
But let's not just take it from the White Coat Investor and Dr. Yount. A local physician, Dr. Douglas Young, happily retired a while ago after a successful career and wrote to me after last week's column. While he might not have called it an IPS, he and his wife set specific financial goals. For instance, he was a U.S. Army physician in his early career, and despite not making very much money and being in a foreign city, they set a tangible goal to save $10,000 (a large sum at the time)--and they did it. That success was an important win early in their lives that proved the value of such goals.
He sees physicians who come out of the gate and do the opposite. They give in to many of the temptations to spend. He sees this phenomenon as a function of not being taught basic financial literacy in the home or in school. He observes that "if a doctor is really tending to his profession, he knows very little about saving, investing, and preparation for retirement." What he enjoyed about the column was the revelation of how many opportunities there are for physicians to manage their money now and reverse many of the trends that have plagued physicians. He also gave one important secret to his success which was to take bonuses and windfalls and put them toward the mortgage. As he said, "a thousand here and a thousand there can add up to some real money."
My team and I have seen some pretty far out investment offers to physicians over the years. Sometimes they are from close friends and family, with investment 'opportunities' for cattle ranches, breweries and restaurants. Saying no is hard to do, but how much better to get to blame it on the IPS. So I ask you, what strategy is in your wallet?
Sarah Catherine Gutierrez is founder, partner and CEO of Aptus Financial in Little Rock. She is also author of the book "But First, Save 10: The One Simple Money Move That Will Change Your Life," published by Et Alia Press. Contact her at sc@aptusfinancial.com.