One of the benefits of outlining your financial and investment goals and the time horizon for meeting them is that it provides clear direction for investing your funds. If you're trying to achieve a secure retirement in a decade or two, you realize that "trying to avoid ever losing money" isn't a primary objective, but instead "earning a sufficient return to reach your savings target (even if it means sometimes going backwards)" is.
Goals and time horizon are the foundation of financial planning, which has become the epicenter of the financial advisor/client relationship almost everywhere. This is true whether we're talking about commission-based brokers, who use a financial plan to justify their security sales, or Registered Investment Advisory (RIA) Firms, who often tout their value as solving the most complex financial challenges you'll face in your life.
The emphasis on financial planning is, of course, a positive development and very different from what we were focused on when I entered the financial industry in the late 1990s. The name of the game in those days was selling securities—stocks, bonds, mutual funds, annuities, etc.—for commissions to meet our monthly sales quotas. Client ("customer") returns? Didn't really matter. Progress towards long-term goals? Yeah right.
But there's such a thing as too much of a good thing, at least right away. And it seems that financial planning has achieved such a stronghold on advisor and client relationships that much less time is spent—up front and on an ongoing basis—on investing and investment principles. In some circles, how you invest is considered irrelevant.
"Investment management is a commodity." "All you need to do is buy an index fund." These are just a few of the misguided views advisors and investors hold. Get the financial planning right, and investing will take care of itself, they say. But will it?
The truth is, long-term financial success is not built solely or even primarily on financial planning. Financial success comes from a good investment experience. Financial planning techniques don't matter much if you don't have any money, and a lot of good ones are irrelevant if you wind up with far less money than you should have. A good investment experience results in a positive financial outcome, regardless of whether you get every single financial planning decision "right." By all means, get clear on the goals and time horizon; everything else planning-related is a refinement.
Where most financial advisor/client interactions begin and primarily focus on financial planning, with very little time spent on investing, I've always approached things differently. I start with and prioritize core investment principles. Approaching financial advising this way helps ensure that a prospective client and I are on the same page and they have reasonable, realistic investment expectations, preventing unpleasant surprises. On an ongoing basis, it helps ensure consistency and client discipline, but, just as importantly, it helps reduce client stress and anxiety that can come from trying to figure out whether or how you're going to change and adapt to every "new" circumstance you encounter.
Investment principles first. Then, and only then, should you shift to discussing personal situations, how to apply core investing principles to client-specific needs, and life changes that might require financial planning or a course change.
Principles before plans.
Which investment principles matter, or matter most? Each one warrants its own article, and collectively, maybe a book. But I'll quickly summarize them below for ease of review.
Avoid "Active" Investing
Sadly, we don't know how to pick just the right stocks (or bonds), nor can we predict the best times to be in and out of the market. Even the pros can't consistently predict the future. And the cost of active investing is considerable. Over the last 20 years, according to the June 2025 SPIVA report, the average professionally actively managed mutual fund underperformed the US market by 2.4% per year (and only 6% outperformed, the other 94% underperformed!!!). Active investing incurs opportunity costs you can't afford to pay, whether you go the professional route or do it yourself.
Start with Asset Allocation
Fortunately, there's an alternative to active management. Owning stocks and bonds through index funds. Stock and bond markets have rewarded investors over time with strong positive returns above inflation; you don't have to outguess them. But you do have to decide on the appropriate asset allocation, or mix of cash (for short-term spending needs), stocks (for maximum expected long-term growth), and short-term bonds (for stability and liquidity for ongoing spending needs, when stocks are down). When you learn that the difference in long-term returns between stocks and bonds has been 5% per year (10% for stocks, 5% for bonds), you realize how important it is to choose your allocation wisely.
Don't Forget To Diversify
Which stocks and bonds? In a world where their returns were all the same, you would buy all of them with little regard to how much you had in different ones. But that's not our world. For example, from 1928 to 2024, US large cap stocks have averaged +10% per year, large value stocks +11.3% and small value stocks +13.1% (Dimensional Indexes). With bonds, short-term, five-year maturities have achieved the same +4.8% return as long-term, 20-year maturities, but with half the volatility!
Diversifying by asset class, owning the asset classes with the best risk/return trade-offs (alone and when combined), and choosing the best mutual funds and ETFs that fully capture the asset-class returns can lead to several percentage points of higher expected returns.
Respect The Randomness
There are many things we know about investing. But what will happen next month, next year, or even over the next few years, isn't one of them. We know what should happen, but expectations and reality don't always align. The best you can do is accept the randomness of short-term returns and use the ebbs and flows to "rebalance," or reset your portfolio back to its target, by periodically selling some of your leaders to buy the laggards. Rebalancing is a more structured, less emotional, more practical investment process than trying to guess the future and jump in and out of the market based on "smart money" forecasts that are anything but smart.
Stay Disciplined
Getting the initial investment decisions right is difficult. But staying committed and disciplined is another challenge altogether, and one that most investors don't succeed with. According to the fund rating company Morningstar ("2025 Mind The Gap" Study), the average mutual fund investor bought and sold their funds at the wrong times repeatedly over the last decade and wound up earning 1.1% lower annual returns than if they had just bought and held the entire time. One of the most important roles of a financial advisor is to provide effective investment advice and counseling to help you avoid doing the wrong thing at the wrong time. And unlike efforts to forecast the future direction of a stock or the market, encouraging you to behave better with your investments is something an advisor can actually do consistently well, and is a service well worth paying for.
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The last 10 to 15 years have been smooth sailing for US stocks and large cap mutual funds and index funds, so advisors who've focused exclusively on financial planning and put investing on autopilot haven't harmed their clients; many do-it-yourselfers got pretty good results just riding the market wave. Newer investors think this is how things have always been. But this period was an anomaly, not the norm. In the future, I doubt this trend will continue.
I see an investment world where there are haves and have-nots. Either you have a strong investment philosophy rooted in core, evidence-based principles that you consistently follow, or you do not. If not, your wealth could suffer unnecessarily, in a way that neither a Roth conversion nor social security timing can fix. I doubt everyone would feel so indifferent to investing decisions if we saw another 10-year period in which US large cap stocks posted negative returns, as they did for the decade through 2009 (don't worry, other core stock asset classes did far better).
As Dimensional founder David Booth says, "the most important thing about an investment philosophy is that you have one."
Plan for that first.
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Past performance is not a guarantee of future results. Index and mutual fund performance includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or additional expenses except where noted. Indexes and mutual funds shown are for illustrative purposes only and may not be the only or any of the funds that Servo clients hold. Servo was not managing client portfolios over the entirety of the periods shown. This content is informational and should not be considered an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.