couple looking at personal finances

Narrowing The Field of Personal Finances

In today’s world, developing expertise in our personal finances doesn’t mean trying to become experts in every market-related data point. That will only add to our confusion. No, the expertise we seek is about how changes in the world around us affect our unique decisions about money.

How wonderful that we have met with a paradox. Now we have some hope of making progress.

Niels Bohr

Nobel Prize winning physicist Niels Bohr was keenly aware of what it took to become an expert: Mistakes, erroneous assumptions, and flaws in the model. As he put it, “An expert is a person who has made all the mistakes that can be made in a very narrow field.” With all that has occurred in the markets over the last several months, we might be keenly aware of the paradoxes and flawed assumptions that are emerging among stocks, bonds, interest rates, and inflation. The silver lining is that by revisiting our assumptions and questioning our plan we continue along a path to mastery in a narrow field: Our personal finances.

If investing was easy, everyone could find success

Investing is difficult because, for all the clarity of a long-term financial plan, the confusing circumstances of the moment can tempt us away from the path to success. As Creative Planning’s Peter Mallouk recently said, “You need discipline and a plan. If you bail on either one in a crisis, what is the point of having them in the first place?”

Years like 2022 are necessary reminders that there are no straight paths in planning and investing. Our job in managing our personal finances is to navigate the tension between events that are often paradoxical: Lower stock prices feel bad. But low prices also mean buying lower in a 401(k) or with idle cash. Higher yields mean lower bond prices, but that also means earning more interest on high quality bonds. 

It is not pollyannish to look for silver linings during volatility. That is, in fact, our job as the CEO of our family’s financial life. We should be observing the world around us without judgement, recognizing what has changed (or not) in our plan, and asking better questions to help understand the path forward. 

As a review of all that has developed so far this year, you can find some bullet points here.

How to be a good CEO of your personal finances

The first step is to understand the facts as they are, and then discern what to do next. Here are some best practices for someone who wants to make good decisions at a time of heightened volatility:

Don’t ask for directions. Which way is the market going? Up, down, sideways…Time spent tracking the minute-to-minute movements of the market is not much use during normal times. During highly volatile times, the fluctuations can add more confusion than clarity. Remember that you are not trying to make an accurate predication about the direction of the markets, rates, or inflation. Your higher purpose is to navigate the reality of whatever may come and adjust what you can control (diversification, cost, or behavior, for example).

The events that change your financial plan are often not the levels of the stock market, interest rates, or inflation. The key moments will be when you decide that your priorities have changed, your timeline has sped up, or your definition of what is financially ‘enough’ has become more clear. 

Pay attention to what has really changed. “I am now 60 years old (or 80, or retiring, or changing jobs…) and I am thinking differently because I am in a different place.” After expressing concern about the state of the markets, this is often what we hear from our clients. They have handled times like this before, but they are in a different place now. 

This is not a conversation about the market being down, this is about what has changed for you. I cannot emphasize this enough: The events that change your financial plan are often not the levels of the stock market, interest rates, or inflation. The key moments will be when you decide that your priorities have changed, your timeline has sped up, or your definition of what is financially “enough” has become more clear. 

Volatile markets are helpful that way. They focus the mind and can drive the conversation with your advisor and your family back to your plan and how it can be responsive to the world as it is.

When the answers aren’t apparent, ask better questions. In recent years I have come to believe that asking good questions is one of the most important skills that clients and their advisors can improve when it comes to personal finances. Here are some questions that would be good to ask during times such as these:

  • Which assumptions have changed in my plan, and which have not?
  • Have any of my timelines accelerated or slowed down?
  • Have I communicated my plan to those who need to know (spouse, family, charities)? Remember that a lack of clarity can lead to anxiety whether times are good or bad.
  • Do I need to take risk to seek higher returns, or can I be more conservative than my risk tolerance might indicate?

One last important question

Finally, here is a very interesting question that financial advisor Michael Kitces asks you to ponder if you feel panicked about market declines:

If a friend called you with the same concerns, what would you advise them to do?

I have asked this on a few occasions and with each response, the answer has been measured, empathetic, and focused on staying the course. The genius behind asking this is that it forces the person who might be anxious to take on the role of a counselor and in turn, rethink how they should approach their own circumstances.

Risk may feel like it is coming from all directions, but this is a moment to focus on that narrow field that is our personal plan. We hope that the information and approach here can help along that journey, but if you need help to understand your plan or just need to know what questions to ask, reach out to your advisor. We are not here to predict the future, but to help you make good decisions when the path is winding and uncertain.

If you feel the need to talk it through, I’d be happy to talk. Contact me at [email protected] or 610-709-5072.

Special Market Report

We understand many of the headlines may cause concern and we want to assure you that Morton Brown Family Wealth is here to answer any questions you may have. We compiled a special overview report of what is happening in the markets.