Originally shared by +Ron Nakamoto
The first email I checked yesterday morning was from the Wall Street Journal. “U.S. Stocks Sell Off Amid Global Rout” was the headline. My mind went back to the times when I was a financial advisor during financial meltdowns in the 80’s and 2000’s. In the midst of the prevailing anxiety, fear, and sometimes panic, I would futilely ask my clients to be calm and revisit their Investment Policy Statements (IPS). I’m sure many advisers were doing the same thing yesterday.
IPS’s are essentially responses to a long series of questions about investing and investments. For example:
• How much do I expect my portfolio to return each year over inflation?
• How much of a loss can I accept over a three-month period, a one-year period, and a five-year period?
• What are my benchmarks for my portfolio?
• What’s my philosophy about risk?
• What’s my philosophy about costs?
• What’s my philosophy about taxes?
• How often will I monitor my portfolio?
The process of creating and maintaining an IPS can be a daunting, abstract, and very intellectual exercise. But these and other questions are important and must be answered if a wealth manager is to do his or her job well. Yet, the usefulness and value of an IPS is very much influenced by the level of self-awareness and self-knowledge that the investor possesses. Reflecting on the practical realities of IPS’s, I now believe that the IPS, the cornerstone of prudent wealth management, doesn’t take into consideration the uncertainty, fear, stress, lack of understanding, lack of knowledge, lack of experience, and general inadequacy of most people when it comes to the task of dealing with wealth, money, and investments in our complex, modern world.
Looking back, I can see how to use the traditional IPS but do so in a more empathetic, humanistic way, especially in times of great volatility and uncertainty. Psychologist Heidi Grant Halvorson employs a useful, research-based technique for accomplishing things. She calls it “if-then planning”. It works like this:
If X happens, then I will do Y
Examples might be:
• “If I feel tired after 8 p.m., then I will won’t do any more work that day”, or
• “If I get an unwanted promotional email, then I will unsubscribe from that email list”.
Combining “if-then planning” with Gratitude and a sense of “True Wealth” (i.e., those things that matter more than money, such as family, friends, health, etc.) creates new ways to address the emotional, sometimes irrational thoughts and mental states that occur when it comes to managing money. For example, a new IPS approach might be:
• If the market goes down (or up) more than 10%, then I will focus on Gratitude as means of coping with stress, anxiety, indecision, overwhelm, etc. Studies indicate that the practice of Gratitude reduces stress and increases the personal sense of happiness and well-being.
• If the market goes down (or up) more than 10%, then I will re-focus on “True Wealth” and on being the best leader I can be because others look to me for vision, direction, and to set the tone for how to handle difficult situations.
Some additional ideas might include:
• If I am inclined to withdraw funds from my investment portfolio, then I will make sure that I am thinking of the well-being of others, especially my family, before spending on unnecessary material things;
• If after considering others, I am still inclined to spend money on myself, then I will make sure that I am investing in experiences that will help me grow as a human being rather than in pleasure-only indulgences.
It’s been my experience that there are cycles of turbulent times; times when the volatility, uncertainty, complexity, and ambiguity (V.U.C.A.) in the world is ubiquitous. Investment Policy Statements are important agreements between advisors and their clients on how to manage investments under all conditions and under all circumstances. Because human beings are “predictably irrational” , some important human elements have, in my judgement, been missing in the traditional Investment Policy Statement. Informing Investment Policy Statements from the perspective of Gratitude and True Wealth would, in my view, enrich the process and empower the participants.