Why Investing Is More Than Just a Financial Plan

What’s the real difference between investing and planning? If you’re like most people, you confuse the two or inevitably emphasize investing because the market gives you headline results you can see – and let’s face it, investing is just more fun than planning to talk about. Fun’s fun, but just remember why you invest.

Investing new offers rallies and crashes, cheers and wails, company names you know. Plans, even if the goals are near to your heart, seem more a blend of just daydream, vague intentions and tons of patience.

You probably don’t see your financial plans, whether it’s on paper or in your head, as clearly as you do your statement balances. You can convert your investments into spendable money; not so your plans.

There’s a problem with this misconception – and it might hurt your future financial security.

Think of investing and structuring your portfolio’s allocation – diversifying your holdings across many different kinds of stocks and sectored, equity mutual funds – like entwining various bundles to make a cable. A single strand inside each bundle represents each company in which you hold stock.

Each bundle represents companies with common characteristics, such as a bundle of large companies, another of small companies, others of value companies, growth companies, U.S.-only companies and so on.

Some know this as asset-class investing, putting your cash into securities that exhibit similar characteristics, behave similarly in the marketplace and are subject to the same laws and regulations. The three main asset classes are equities (stocks), fixed-income (bonds) and cash equivalents (money market instruments).

Bond strands might make up other bundles: long-term bonds, intermediate- and short-term bonds, U.S. and international bonds, bond funds (similar to stock mutual funds) and so forth. Still other bundles might hold other types of investments with common characteristics.

All the bundles together represent your overall, well-diversified portfolio.

Neat image, but here’s the problem: You focus so much on designing the cable that you forget its purpose. The cable is there to hold up the bridge, in terrible weather as well as good, in bear markets as well as in bullish ones. Focusing on the money obscures why you invest the cash in the first place.

And if you’re like most people, you cared enough to forge a financial plan somewhere in your past. A recent survey from the Certified Financial Planner Board of Standards shows that close to nine in 10 American households engage in some type of “formal or informal” financial planning. Fewer than one in five, though, hire a professional financial advisor, fuel an emergency fund or save toward specific goals.

Maybe the other households are too busy weaving the cables together, taking a break now and then to swig the brew of micro-news of the ups and downs on Wall Street. The cable holds up the bridge just as your investments support your financial plan.

That bridge gets you from where you are to where you want to go with your money. Stay focused on the purpose of your financial plan and just keep across that bridge.

Follow AdviceIQ on Twitter at @adviceiq.

Larry R. Frank Sr., CFP, is a Registered Investment Adviser (California) in Roseville, Calif. He is the author of the book, Wealth Odyssey. He has an MBA with a finance concentration and B.S. cum laude in physics with which he views the world of money dynamically. He has peer-reviewed research published in the Journal of Financial Planning. http://blog.betterfinancialeducation.com/.

AdviceIQ delivers quality personal finance articles by both financial advisors and AdviceIQ editors. It ranks advisors in your area by specialty, including small businesses, doctors and clients of modest means, for example. Those with the biggest number of clients in a given specialty rank the highest. AdviceIQ also vets ranked advisors so only those with pristine regulatory histories can participate. AdviceIQ was launched Jan. 9, 2012, by veteran Wall Street executives, editors and technologists. Right now, investors may see many advisor rankings, although in some areas only a few are ranked. Check back often as thousands of advisors are undergoing AdviceIQ screening. New advisors appear in rankings daily.