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  • Writer's pictureJeran Van Alfen, CFP®

Balance in the Investment Process

The name Centered Financial grew out of the idea that we all need to strive for balance as we approach the path to financial progress. Whether we are discussing investing, paying off debt, building a business, or any other process involving money, there is an emotional component that has to be considered before making sound decisions. If decisions are made with an attitude of scarcity, too often we can’t achieve the growth that we need over time to reach our goals. Likewise, if there is no care or prudence given to financial choices, we may be exposed to risk that cripples our chances for long term prosperity.

Years ago, I listened to a presentation that outlined the “Seven Deadly Sins of Investing.”

Here is the list:

1. Emotion

2. Disorganization

3. Myopia (Nearsightedness)

4. Impatience

5. Greed

6. Arrogance

7. Cowardice

I was reminded of this list this week, as I typically am whenever the market has a downward turn. These are seven items that often have a detriment to one’s investment plan and cause the most severe negative consequences. As I reviewed the list this week, it struck me that they all have to do with being out of balance or straying away from your “center”.

The result of these seven imbalances is making mistakes. Common investor mistakes when we are out of balance include:

· Panic or jumping to conclusions

· Timing: trying to capitalize on news or events to get in or out of the market

· Swinging for the fences: the realization of being out of balance, trying to accomplish everything all at once

· Inertia: listening to everyone else. Going with the crowd and disregarding your personal goals

· Believing this time is different: ignoring sound principles

· Performance worship: focusing on the short-term stats and not what your long term performance needs are

As investors we should expect markets and values to go up and down and our paper values to change all the time, but we really only lose money when we lock in a loss. Typically, when we lock in a loss it is the result of one of the mistakes above.

So, how do we prevent this? As investors, it seems that there is so much out of our control. The answer is process. We focus on what we can control and only take on the risk that we are comfortable with. In the last Sunday newsletter, I referenced the first principle of Centered Financial’s investment process as Asset Allocation. Your asset allocation controls your exposure to risk and guides your long-term investment results. Your asset allocation is passive. This means that we only want to change your asset allocation when there is a significant change in your financial plan that would require you to take more or less risk. We don’t want to change asset allocation based on thinking resulting from any of the “Seven Deadly Sins” listed above. These types of changes lead to imbalance, which leads to mistakes.

In coming newsletters, I will discuss the next two principles of the Centered investment process: Focus on cost and efficiency and Managing behavior with an educated approach. These next two principles outline the intricacies beneath asset allocation. How we choose what to invest in and how we make decisions to avoid the mistakes above. Everything is a process.

As we work together on this path to financial prosperity, it is important to understand that each of us is living a unique life and your financial plan needs to be unique as well. That’s what I enjoy so much about this process: understanding your unique needs and building a plan specifically for your journey. If either one of us experiences imbalance along the way, we have a process to guide us back to the center. Enjoy your upcoming week!

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