My first car was a 1992 Acura Integra. The front half was bright green, and the back half was dark green, the result of too much ambition and too little skill. Not to say that I’m unskilled when it comes to vehicles. I can change my own oil and rotate my tires. I understand what a solenoid is and how a catalytic converter works. I could even re-gap the sparkplugs if I needed to.
My little Acura was a wonderful car. And then one day, when driving east to see Darcy, it just turned off. Lights out, engine silent. Nap time for my little green Acura.
You see, what happened that day was a result of the alternator dying about a week earlier. And I had spent that week quizzically pondering why my battery light was on.
I have what you would consider a reductionist understanding of what makes a car go. Each separate component makes sense to me. I understand there are lots of different parts, and that together these parts make systems. I am capable of the basic maintenance required of a conscientious owner, and I drive defensively.
But I am not a mechanic. And when my little car died on the side of the highway, I was genuinely surprised. Because while my reductionism had me checking electrolyte levels and making sure there were jumper cables in the car, not once did I consider that the problem wasn’t actually the battery. A little alternator didn’t light up on my dash, a battery light did. How was I to know?
The complexity of vehicles has increased significantly over time. This added complexity is a result of the desire for more efficient systems. What a new car lacks in extra space under the hood it makes up for in durability, safety, and fuel economy.
For these reasons, complex systems are good. But the reality is the more complex a system becomes, the more dangerous a reductionist understanding is. This applies to financial management in a big way. A basic understanding of parts, such as investments, or insurance, is good. An understanding of more complex systems such as tax, or macroeconomics is even better.
But a system is more than just a sum of parts. And a financial plan needs to be more than just investment management or insurance placement. It is the integration of all systems within the universe they operate in, balancing efficiency and practicality through the exchange of resources. Sometimes this means the impedance of one system for the benefit of the whole.
Tax is a great example to use because just about anyone can relate. People are always talking about how much they hate tax, and are looking for solutions that help them deter or eliminate tax. But while the deterrence of tax is an excellent goal, it creates an isolated focus on the tax system, and that system is purely complimentary.
Like fuel efficiency, tax savings in itself is not a primary goal. Transporting oneself to work, or becoming financially independent, that is the goal. Consider: riding a pedal bike is extremely fuel efficient, but that doesn’t make it a good choice when you need to get from Vermilion to Lloyd every day. Just the same, not triggering unrealized capital gains on your investments is a tax efficient strategy, but sometimes it’s better to trigger capital gains and deal with the tax than it is to wait for the capital gains to go away on their own (I’m alluding to a market correction. Capital gains don’t actually dissolve over time).
Another great example is the industry-fueled focus on investment returns. Rates of return are the product of the investment system, but again they are not a primary goal. What’s your alpha? Are you a passive or active investor? Do your funds consistently beat the markets? Yeah, guess what? It doesn’t matter. Like my belief that a dashboard battery light is caused by a problem with my battery, it’s important to understand that the majority of an investor’s financial success is created by their own behavior, such as the adherence to a strategic asset allocation, not the markets or investment returns themselves.
In this case it’s easiest to introduce numbers. An investor who earned 7% in 2014 might feel deflated next to an investor that earned 14%. But if the same 7% investor had earned 7% consistently for the past three years, and the other investor had a series of +18%, -11%, +14% (averaging 7%), the investor who had focused on stability and invested consistently with their strategic asset allocation would have been much less prone to error than an investor making emotional decisions based on the past performance of their portfolio.
While rates of return are an important product of the investment system, they are a complimentary by-product, not a goal. Are you going to have enough money to live once you stop working? That’s the goal.
A reductionist understanding of financial planning can be dangerous, and the illusion of competence can be costly. Conversely, a holistic integration and balance of each system can create a beautiful, efficient, and durable machine. And while many owners will be more than capable of their own basic maintenance, when it comes to advanced financial planning and wealth management, that engine needs the skill of a specialist.
Financial Planning is the ongoing goals-based integration of many complex systems and products. If you have questions on appropriate financial maintenance for competent owners, or for more information on how a financial plan creates efficiency and synergy within your engine, speak with a CERTIFIED FINANCIAL PLANNER® today.
Written by Meagan S. Balaneski, CFP, R.F.P CERTIFIED FINANCIAL PLANNER®
Advantage Insurance & Investment Advisors
Investment Funds Representative
Manulife Securities Investment Services Inc.
The opinions expressed are those of Meagan S. Balaneski and may not necessarily reflect the views of Manulife Securities Investment Services Inc.