Sometimes being a financial planner can make you feel like an imposter.
I particularly get that feeling when I advise clients to do something that I haven’t done myself. And while I have good reasons – I think! – for occasionally offering advice that I don’t follow, the feeling is still an uneasy one.
I can think of three major ways I have personally diverged from the guidance I regularly give to clients.
So in this column, I’m coming clean on the instances where I don’t practice what I preach. I guess this is kind of like a confession. Forgive me, dear readers, for I have sinned.
When I talk to new clients about our investing style, I like to emphasize our philosophy of avoiding investing in individual company stocks. We use ETFs that bundle a bunch of different companies into one convenient investment. We do this because ETFs provide instant diversification. That ensures the blow-up of one company won’t derail our clients’ portfolios. It’s a smart way to invest.
But I periodically invest in individual companies with my own money. That’s certainly not because I’m keeping the good investment ideas to myself. It’s simpler than that. It’s because I could be wrong.
I’m perfectly fine being wrong with my own money. In fact, I’m comfortable being really wrong, which means losing a lot of money at times if things don’t play out the way I anticipate. I can’t seem to summon the same courage with clients’ money. It’s far too precious.
Plus, the odds are heavily stacked against stock pickers. For most people, they hit it big on a few investments, lose big on others, and ultimately end up with poorer returns than they could have earned by owning a solid ETF that holds stock in a broad array of companies.
I don’t always follow that good advice, though.
One down, two to go.
When we build financial plans for clients, there almost always is a recommendation for life insurance. For couples, if one spouse dies at a relatively young age, we want to ensure the surviving spouse can continue living a good life, free of financial worries.
Life insurance provides the perfect protection for such an unfortunate event. And yet, I’ve never purchased life insurance myself. I have had group life insurance with premiums covered by my employers, but that’s it.
Here’s my thinking. I believe life insurance is best used for financial protection. But not everyone needs that protection. My wife and I both have solid jobs and sufficient savings. If one of us dies, the other will be fine from a financial perspective, even without the boost from a life insurance death benefit.
We are fortunate to be in such a position, but I still question myself if I’m taking an unnecessary risk. Term insurance is cheap, so there are worthy arguments for securing a policy in case our financial life takes a U-turn. For now, though, we have accepted that risk.
Okay – one last confession.
I don’t like seeing clients hold too much cash. By that, I mean money sitting in a checking or savings account – even CDs. That money can usually be redeployed into higher-earning opportunities, such as bonds, stocks, land, or rental properties. So we typically instruct clients to hold just enough cash to cover them in an emergency – but no more.
I have ignored that advice in the past. I too often think that I’ll miss a big opportunity if I don’t hold enough cash. But I’ll bet if I had just put most of our excess cash into stocks over time, our financial position would be enhanced. Cash is a drag on performance, but holding too much cash is a habit I find hard to kick.
So there you have it. That’s the advice I often give but fail to follow. It feels good to get that off my chest. It’s been weighing me down for a while. I hope you can forgive me.
Oh, and for my penance, I plan to read a book by Suze Orman and listen to two Dave Ramsey episodes.