(a book review)
Financial planning can be intimidating. You wonder, am I doing the right thing? Am I working with the right advisor? Is there something better out there for me?
When it comes to money, most people have stiff opinions. They will confidently share them with you, too. While they may intend to be helpful, you may walk away feeling confused about what to do. Or, ashamed that you aren’t doing it right.
I have good news. There is a radically different approach to financial planning. It’s smart, simple, and non-intimidating.
Nick Murray’s book, Behavioral Investment Counseling, is radically different from every other investment planning book I have read (Murray, 2008). Murray’s humble tone throughout the book delivers the message that financial planners shouldn’t feel the pressure of creating a one-of-a-kind, brilliant financial plan. Rather, they need a simple, solid financial plan (Murray, 2008). While the financial plan is key, the real value is held in their role of counseling the client to stick to that financial plan long-term (Murray, 2008). Rather than thinking of themselves as portfolio managers or investment wizards, financial planners should consider their role to be that of a behavioral investment counselor (Murray, 2008).
Murray points out that financial planners tend to get into the weeds by overemphasizing the performance of certain funds (Murray, 2008). Their marketing tends to focus on “…how many of their funds carry four- and five-star ratings, or have beaten the S&P 500—or their Lipper peer group averages…” (Murray, 2008, p. 7). Murray dispels this misconception. He clarifies that timing and selection of funds isn’t the key to a successful financial plan; behavior is (Murray, 2008, p. 7). His message is clear: don’t get caught up in selecting the “perfect” fund, because there is no such thing. For this reason, he doesn’t miss a beat when clients claim that competitor a firm suggests a better performing investment. He knows that is simply conjecture.
In fact, Murray refuses to engage when clients question the performance of a fund choice. He says, “‘outperformance’ is neither a financial goal nor a plan for the attainment of financial goals” (Murray, 2008, p. 24). While this statement seems contrary to financial planning trends of sophisticated rating systems and financial projections, he doesn’t believe advisors can select exceptionally profitable funds (Murray, 2008). There is no use in boasting about or projecting superior rates of carefully selected funds because there is absolutely no guarantee that they will continue performing as they have in the past (Murray, 2008). Past performance does not indicate future performance (Murray, 2008, p. 24). This disclosure must be written in fine print at the bottom of all financial illustrations when using past performance indicators. Yet, it’s easy to overlook. However, Murray makes its implications clear. Using the past performance of a fund to predict its future performance is “the ultimate fools errand” (Murray, 2008, p. 24). It simply doesn’t work.
What does work is to select a sensible allocation strategy, choose solid funds, and stick with them for the long-term (Murray, 2008). He further clarifies that it doesn’t even matter if the funds are actively or passively managed (Murray, 2008, p. 25). Successful investing is long-term focused, and based on client-specific goals (Murray, 2008).
Murray’s investing principles are simple. He says the keys to long-term investing success is having patience through rough patches in the market, and having the discipline to stick to the original plan when the going gets tough (Murray, 2008, p. 83).
Why is the financial planner’s key role to keep their client on track with their financial plan? Because it’s their nature to veer from it (Murray, 2008). Murray says that “there is good evidence that over 20-year periods the average equity mutual fund investor will behaviorally do himself out of nearly 60% of the return produced by the average equity mutual fund. He thus underperforms not just the market but his own investments” (Murray, 2008, p. 24). I assume this is why Murray refers to financial planners as behavioral investment counselors. The first step of their job is coming up with a financial plan. While the financial plan is of utmost importance, it is not where the majority of a financial planner’s effort should be allocated to. Their time and energy will focus on coaching their clients to stick to the financial plan like glue.
While Murray’s focus of the book is to demystify the intimidating façade of financial planning, he still addresses the functional components of a good financial plan. For example, he talks about diversification. Murray writes that while diversification is important, financial planners should focus simply on implementing some form of diversification, rather than getting caught up on in devising a special diversification formula (Murray, 2008, p. 98). He says, “How you diversify is infinitely less important than that you diversify (Murray, 2008, p. 98).
Murray makes a point to avoid giving diversification formulas (Murray, 2008). He reluctantly gives a recommended blended allocation strategy of big cap growth, big cap value, small cap growth, small cap value, and international/emerging markets (Murray, 2008, p. 87). However, Murray makes it clear that while allocation strategies are vital when first establishing the financial plan, the secret sauce lies in adhering to the financial plan over a life time (Murray, 2008). In fact, in a humorous way, Murray makes light of financial planners who claim to have a superior investment strategy (Murray, 2008).
Other sound financial advice Murray recommends is annual rebalancing. While he discourages financial planners from overcomplicating the process, he indicates the importance of “…returning the portfolio to its target diversification annually on the same day” (Murray, 2008, p. 99). He warns not to give into fear of market corrections or the temptation to veer off the original plan to incorporate a new and shiny element (Murray, 2008).
The trend in financial planning is to slowly convert an investment portfolio from aggressive to conservative. The conventional thought is that while an individual is young and has a long investment horizon, they can weather the storm of market volatility. However, as they approach retirement, their risk tolerance wanes, because of the fear of losing their principal when they can’t afford it. In retirement, therefore, it’s common for investors to avoid investing in securities because of their volatility.
Murray proposes a different approach to allocation in retirement. He says that investors are better off sticking with the original plan of stock-based investments, rather than taking the conventional approach of retreating to conservative investments (Murray, 2008). In fact, Murray feels so strongly about this, he says “taking a purely fixed-income investment strategy into 30 years of rising living costs would be tantamount to financial suicide” (Murray, 2008, p. 228). He says that investors shouldn’t shy away from securities in retirement, just because that is conventional wisdom (Murray, 2008). It’s easy to succumb to the fixed-income strategy in retirement, out of fear that impending market correction could devastate one’s retirement savings. Murray clarifies that market recessions are part of the healthy cycle of the stock market (Murray, 2008). As long as the investor doesn’t cash out and run during a market dip, the skies will clear and the investment will bounce back (Murray, 2008). In the long run, this is a better approach, because the higher securities returns (versus fixed-income) allows the retiree to keep up with rising costs of living.
None of us are perfect. Murray can’t be either. I have raved about him thus far, so now I must acknowledge areas that I should look at with a skeptical eye. One of Murray’s most audacious statistics, which I mentioned earlier, was that individual investors may underperform the market, or even their own investments by up to 60% (Murray, 2008, p. 24). How does he measure that? He indicates that it is measured over 20 year periods, and reflects the “average equity mutual fund investor” (Murray, 2008, p. 24). What about people who invest in index funds? Or ETFs? Does it include people who have financial advisors? Or are they self-managing their funds? I think it would be helpful to better understand the data Murray provides.
Because Murray’s strategies seem too simple to be adopted by the current culture of financial planning, it forces the question: who is Nick Murray? And, is his writing trustworthy? Murray has led a successful career in financial advising since 1967 (Murray, 2008, p. 273). He is a leader in the industry. He was the founding director of what eventually would become the Financial Planning Association (Murray, 2008, p. 273). His credibility is solid. While his message may seem too good to be true, it isn’t.
Murray, N. (2008). Behavioral Investment Counseling. The Nick Murray Company, Inc.