In this episode, I’m joined by Dr. Preston Cherry, Head of Financial Planning and Assistant Professor of Finance at the University of Wisconsin Green Bay. He is also the president of the Financial Therapy Association and host of the Life Money Balance podcast.
Listen now and learn:
- The importance of setting expectations in advance of investing
- The difference between investment planning and investment management
Detailed show notes and the video interview are below.
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Show Notes
I’m joined in this episode by Dr. Preston cherry, Head of Financial Planning and Assistant Professor of Finance at the University of Wisconsin Green Bay. He is also the president of the Financial Therapy Association and host of the new podcast Life Money Balance.
We get to talk a little bit about music at the beginning of the episode, but then we dive into a conversation about investment management versus investment planning.
Here are some of my notes from the conversation…
4:29 – Setting Upfront Expectations for Your Investments
When we set up expectations on the front end, it helps us manage the moments we get worked up about things on the investment side.
When we are setting expectations of what we’re going to experience over the long term, and we’re having that conversation with clients with ourselves, we’re asking:
- What is our purpose?
- What is our time horizon?
- What do we want to experience?
- And what is to be expected?
So when there is market volatility, that education on the front end helps us understand the purpose tied to what we’re doing with our investments.
Advisors must be empathetic during periods of market volatility because each downturn always feels different and it’s okay for people to have anxious feelings. But doing the work upfront gives us a framework to revisit during these times of uncertainty.
Investment management is making decisions about things like asset allocation, security selection, rebalancing, and tax-loss harvesting. But we have to decouple investment management from investment planning – they’re two separate things.
When we’re planning, you’re encompassing and aligning all the areas of life and money. It’s integrated and flexible. It’s more comprehensive in nature.
Preston starts conversations by trying to establish what a person has experienced in the past. Then he begins to establish expectations of what we’re going to do in the future so that we don’t make emotional decisions.
For example, Preston likes to ask people how they felt and reacted in previous market cycles. Then he will ask what they would like to do differently. This allows him to establish a pattern in their personality and open the conversation up for honest education.
16:12 – Having a System Managing Money In a Downturn
It’s one thing to de-risk, but you have to stay invested. That usually requires having a system in place, which goes back to the idea of investment management versus investment planning. Having a system in place – that’s the planning.
What we’re experiencing right now in markets is totally normal. If you do the upfront education, then clients should know that markets are going to lose at least 10% every other year, at least 20% every three or four years, and at least 30% about once a decade.
So what is the system in place for these situations?
Hopefully, you’re in a portfolio that acknowledged that these downturns are always going to happen for who knows what reason, but they’re going to continue happening with a similar magnitude and frequency as they have in the past and to your point.
Preston calls out that if you make some tweaks, the important thing is to stay invested. The biggest mistake is not staying invested.
20:30 – FOMO : Focus on Moving On
Preston says that “Focus On Moving On” is greater than “Fear Of Missing Out.”
When you’re diversified as part of a sound investment plan, there are going to be times when you didn’t own the winner. But that’s part of the expectations that need to be set up front. That when FOMO arises, you need to focus on moving on with your plan that emphasizes the framework you established for investing upfront.
When it comes to a diversified portfolio, it should never win. A diversified portfolio should never have the highest performance. If you somehow beat everything, you’re not diversified. You’re doing it wrong.
27:53 – Financial Therapy
It’s natural to feel anxious about markets, but sometimes people have anxieties or stresses that reach a different level.
Financial therapy deals with how we think, feel, and behave about money. We can’t forget that we’re dealing with humans. It’s important to create an environment that allows people to have the courage to ask questions.
Financial therapy is different from the financial planning process because you’re talking about an area of past and/or present that is traumatic to the point that it is creating a barrier. Financial advisors should have tools and techniques to address many of the emotions, but sometimes you need to see someone that can work that barrier out and come to a healthier place with it.
32:16 – Dr. Preston Cherry’s Book Recommendations
- The Psychology of Financial Planning by CFP Board
- Your Client’s Story by Scott West and Mitch Anthony
- Getting Good with Money by Tiffany Aliche
- In the Meantime by Shehara Wooten
- Madam C.J. Walker’s Gospel of Giving by Tyrone McKinley Freeman
- The Alchemist by Paulo Coelho
- Atlas of the Heart by Brené Brown
34:46 – What It Means to Be A Long Term Investor
You’re investing as a tool to achieve what Preston calls “life money balance.” When you’re investing long term across multiple life cycles in order to achieve your life aspirations. So being a long-term investor is being committed to that. Knowing where you want to go, creating your life design, and investing accordingly. And when you have set expectations up front, it helps you through calm times and periods of uncertainty.
35:59 – Where You Can Find Dr. Preston Cherry
- Website: https://www.concurrentfp.com
- Twitter: @DrPrestonCherry
- LinkedIn: Dr. Preston Cherry
- Facebook: Dr. Preston Cherry
- Instagram: @drprestoncherry
- Podcast: Life Money Balance
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Long-term investing made simple. Most people enter the markets without understanding how to grow their wealth over the long term or clearly hit their financial goals. The Long Term Investor shows you how to proactively minimize taxes, hedge against rising inflation, and ride the waves of volatility with confidence.
Hosted by the advisor, Chief Investment Officer of Plancorp, and author of “Making Money Simple,” Peter Lazaroff shares practical advice on how to make smart investment decisions your future self with thank you for. A go-to source for top media outlets like CNBC, the Wall Street Journal, and CNN Money, Peter unpacks the clear, strategic, and calculated approach he uses to decisively manage over 5.5 billion in investments for clients at Plancorp.
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