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4 field-tested steps to making better wealth decisions

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*Note: This is Part 2 of a two-part series. Click here to read Part 1, where we discussed the magnitude of available options today and their impact on financial decisions. To receive helpful posts like this directly to your inbox, sign up for our free newsletter!

 

Last time on the Cordant blog, we explored how being overwhelmed by too much information can lead to not taking any action or simply making a default decision—one that is likely not intentional or ideal.

Making financial decisions can be difficult; there is no question. But they are also highly important. How can one overcome the overload of information available to make better financial decisions and aren’t simply “what we did last time”?

Read on for four ways to overcome this default behavior and make better financial decisions.


A 4-step framework to making decisions

1. Don’t put it off

Waiting to make decisions about your wealth can have tremendous consequences. Imagine someone you know putting off dealing with financial questions, and passing away before getting them answered. Think about the impact on their family of not setting up an estate plan to properly distribute assets to heirs, or not having an adequate insurance plan in place before their passing.

Such decisions are easy to put off in our busy day-to-day lives, but acknowledging their magnitude and influence on our financial health is the first step in taking action.

2. Identify objectives

“Begin with the end in mind” – Stephen Covey

The second step is figuring out what you want to accomplish with your finances. We call this being Intentional about your wealth. Getting this clarity helps narrow down the best strategies available to allow you achieve your goals, and to keep you focused on what you seek to accomplish.

This is particularly relevant when it comes to making investment decisions. A good investment strategy is one that you are sure of, so that you can take advantage of the good times in the market—and one that you’re confident will protect you in the bad times. That way, when the inevitable market corrections comes, you know you’ll be properly positioned.

As we saw last time on the Cordant blog, narrowing down and simplifying our choices can help facilitate better decision-making. Identifying financial objectives early on allows you to focus on the good options by being clear on what you want to achieve—thereby helping you take decisive action.

3. Pick your battles

“Any time you end up saying yes to one thing, you are simultaneously saying no to an infinite number of others.” – Rory Vaden

The fact is, we have to make hundreds of decisions every day—and we have limited stores of energy to draw from to make them. The key is to focus energy only on the most important decisions, and to spend these resources wisely.

Before allotting vast quantities of time to a decision, ask yourself: How much does this decision matter in the long run? How much impact does it have on my larger financial goals and objectives?

For example, in today’s low interest rate environment, it isn’t worth spending a whole lot of time vacillating between a high-yield savings account paying 0.4% and 0.5%. On the other hand, making sure your 401(k) reflects your optimal risk exposure is worth devoting time to.

Not to mention, when it comes to individual stock selection, research suggests the overwhelming majority of people are bad stock pickers. So agonizing between Stock A or Stock B is not likely to be a productive use of your time. Instead, focus on the percentage of your portfolio that you should have in stocks generally. Is this an acceptable level of risk given your risk tolerance? And does this help you achieve your goals?

4. Seek expert guidance

Psychologist Daniel Gilbert, author of the bestseller Stumbling on Happiness, gave a great Ted Talk in 2005 called “Why We Make Bad Decisions.”

One of his solutions to making better decisions was simple: If you don’t have the necessary experience to make the decision, ask someone who does.

In a study from 2006-2012, Aon Hewitt looked at the investment performance of retirement plan participants across 14 companies. They broke participants into two groups, those receiving help (i.e., who sought financial advice) and those not receiving help. Here is what they found:

On average, across eight different age cohorts, the difference in annual returns for Help Participants was 3.32% higher than for Non-Help Participants, net of fees. Additionally, the difference in annual returns for Help Participants was better in each age group, with the median annual performance difference ranging from 2.13% to 3.70%.

Source: Aon Hewitt "Help in Defined Contribution Plans: 2006 through 2012" Source: Aon Hewitt "Help in Defined Contribution Plans: 2006 through 2012"

 

Their conclusion was definitive—seeking help resulted in drastically better performance net of all fees, and this performance improvement carried across to every age group.

We know that the sheer volume of available options in today’s world can be overwhelming—and navigating through them to isolate the correct choice can be a challenge. But if you employ this four-step framework, it will be easier to take action, and make decisions empowered by intention.

 

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Want to learn more about how Cordant helps our clients intentionally manage their wealth? Give us a call at 503.621.9207.


Click here for disclosures regarding information contained in blog postings.

Click here for disclosures regarding information contained in blog postings.
Cordant, Inc. is not affiliated or associated with, or endorsed by, Intel.

Published on April 21, 2015

Isaac Presley, CFA

Isaac Presley, CFA

Isaac Presley is the President and Director of Investments for Cordant, a wealth management firm serving current and former Intel employees. To learn more, you can read Isaac's full bio.

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