This is one of the “10 Steps in the Right Direction” that make up the Pasadena Financial Planner‘s personal financial planning and personal investment management process. For a summary of these ten steps, see “Your Family Financial Planning.” To find an in-depth article for each step, just click the Sitemap link at the top of this page. Also, you can reach us by using the contact form below, and you can subscribe to our Family Financial Planning Blogs. Please enjoy reading this article. Thank you!

This ten-step optimal financial planning and investment management efficiency process envisions time-efficiency throughout all its phases.

When pursuing optimal financial planning and investing strategies and controlling your costs and capital gains taxes, you also need to establish a time-efficient system to monitor, adjust, and adhere to your financial plan. You need to control and limit the time that you spend on your financial planning, and you need to focus your planning efforts on the most effective activities.

Furthermore, since time is always money, you need to ensure that the financial advisors and investment counselors that you hire are also efficient. They need to deliver tangible value and do it quickly and efficiently. Obviously, you should also carefully monitor them and ensure that their recommendations are optimal and in your best interests.

Post-Financial Crisis Notes Concerning:

Investing Strategies

Note: The best personal financial planning and investment practices are enduring and would not vary due to any financial crisis. The detailed article below was written before the recent credit crunch, and it doesn’t need to be revised. In light of the financial crisis, however, the update comments in this box emphasize the enduring wisdom of this original article.

Perhaps the most overlooked aspect of personal investment management is the incredible waste of time. Do-it-yourself individual investors and/or their high cost active professional investment managers demonstrably tend to under-perform passive index benchmarks — especially as the time period increases. Many people waste a large part of their lives implementing investment strategies that have no reliable expectation of doing them any good. Alternatively, they pay active professional fund managers excessive fees to do the same dance with poor results, as well.

With investing less is more. On average over time, people are exposed to less risk and get better net investment results after investing costs and taxes are considered, when they invest in a globally diversified, passive index fund portfolio that they (or their advisers) do not keep changing. Less is more when you buy and hold and hold and hold a portfolio with an asset allocation that is appropriate for your investment risk tolerance. The financial research literature repeatedly demonstrates this. The only reasons why the active management “debate” never seems to be settled is that those who make money off of other people’s money keep telling people to do something rather than do nothing. Doing something always costs more, but there is so much volatility in securities prices that there will always appear to be short-term winners who seemingly have skill, when in fact superior results are far more likely to just be short-term dumb luck.

The foregoing does not explicitly measure the time-efficiency of individual investor investing activities. With professional investors, you can evaluate investment performance over time relative to incremental costs and taxes. When this is done in careful investment research studies, investment professionals tend not to look so professional or so valuable after all. However, individual investors tend to be more atrocious investment managers when the do it themselves.

Without the details, do-it-yourself individual investors make all sorts of investment errors. (See the links in this article.) The result is usually either no benefit or negative results for the effort expended. No sane person would work for an employer who paid them a zero dollar or negative hourly wage, but millions of amateur investors do this to themselves. They keep fooling themselves, because few ever bother to compare their results carefully against a low-cost, fully passive, and totally hands off index fund investment strategy. People waste huge amounts of time and get negative results that they never realize. Do yourself a favor and fire yourself as an investment manager of your own portfolio. Adopt a low-cost, globally diversified, direct purchase, index investment fund strategy and then leave it alone. Instead, spend your time doing something else that you really do enjoy doing. By the way, it is quite likely that by not wasting your time to under-perform a passive index fund portfolio, you will instead actually be paying yourself to do something that you enjoy doing far more than amateur investing.

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Personal financial planning and investing is a lifelong process and not a one-time exercise. Personal situations and financial requirements change, as do the economy and the financial markets. Investment plans need to evolve. By establishing optimal practices at the outset, you can reduce your financial planning and investment management time and get on with other things you might prefer to do.

Scientifically valid financial management and investing strategies often are more time efficient, largely because they are consistently passive rather than active in nature.

For example, given the recommendation in Step 4 to use a Global Investment Diversification strategy, it is questionable whether the vast majority of individual investors should own any common stocks or individual bonds directly. Instead, they can achieve similar expected returns with lower risk by owning index mutual funds or exchange-traded funds (ETFs). The superiority of broadly diversified index mutual fund and ETF based investing for individual investors is broadly established in the financial research literature. Therefore, you should question why any financial advisor, who supposedly is operating in your best interests, would recommend that you hold an under-diversified portfolio.

Note that, in your quest for personal financial planning and investment management efficiency, you also should have a very strong preference for advisors who will only charge you hourly fees or fixed project fees. Then, at least you have a much better chance of evaluating the scope the assistance and tracking the real costs of the efforts that go into advising you. You will be able to control your advisory costs more directly, and you will not have to tolerate advisory hand waving just to justify continuing high fees and asset sharing arrangements. (See these articles: ” Cost Control and Investment Performance Improvement“, which are published on our sister website, The Skilled Investor.)

With financial services, which inevitably are very costly, less is most often more. This is particularly true given the predominant financial services industry business models that view “retail” clients as revenue and profit centers. When you in fact pay “free” advisors by letting someone else pay them, your best interests are at great risk. When you repeatedly pay a percentage of your valuable assets for financial and investment management services, you let someone feed continuously in your trough. Furthermore, with these repeated percent of assets fees, there often is no meaningful connection between what you pay and the value of what you get in return. Financial services industry fees are horrendously high, so you should protect yourself.

A side benefit of choosing index mutual fund and ETF fund-based investments is to be more time efficient. Index mutual funds and exchange-traded funds require far less personal attention.

Most individuals are poor portfolio managers. For the great majority of investors, portfolio self-management yields inferior risk-adjusted results. (See this article: What is the cost to individual investors of sub-optimal diversification?, which is published on our sister website, The Skilled Investor.)

Managing a well-diversified, passive index-based portfolio of individual securities is a task that professional portfolio money managers can manage much more economically. Not owning individual securities means that individual investors do not have to keep up with and decide on a myriad of minutia about dozens or hundreds of companies.

When you finally figure out that active investment management strategies just enrich the financial services industry at your expense, you will quickly abandon them.

Then, it should become incredibly obvious to you that you should turn the index portfolio management task over to professional index mutual fund and ETF managers. The most cost effective multi-billion dollar index investment funds can be managed very efficiently by just a couple of skilled traders.

Monitoring and adjusting your investment plan requires a periodic commitment of your time, but that commitment can be modest. If you choose optimal investment strategies and properly automate your financial tracking and periodic investing to the degree possible, then spending more time on personal finance becomes a matter of choice and not a necessity.

Despite the great importance of financial planning and investment programs, people have lives to live, work to attend to, and family and friends to love and play with.

Financial and investment planning should not and does not have to impose an excessive time burden. Unless financial planning and investing is an enjoyable hobby, which it is to some, there is a significant personal cost to spending time on personal finances. It is important to calculate one’s “effective hourly wage” for the time spent on investment management and to ensure that this hourly wage remains high.

See these financial planning and investment management personal efficiency articles about the value of your time, which are also published on our sister website, The Skilled Investor:

• Investment Opportunity Cost
• Scientific Investment Strategies
• Value-added Investing
• Investment Time

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See: Pasadena Financial Advisors >>>

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Larry Russell, Managing Director

MBA – Stanford University, MA – Brandeis University, and BS – M.I.T.

Lawrence Russell and Company Pasadena, California 91103

(626) 399-9579

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — DILIGENCE — SATISFACTION

A truly independent financial planner and fee only investment advisor

(Regarding compensation, I charge solely on a fixed fee or hourly fee for services basis, under a contract that we agree upon. You will not have to pay any asset fees. In addition, in the interest of avoiding any conflict-of-interest, I never accept commissions or compensation of any kind from the financial services industry.)

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