Actions alone are not a plan

By DAVID MOON, Moon Capital Management, LLC
February 17, 2013

There is a difference between taking an action and making a plan. This is true with your investments as much as anywhere in your life.

But when our fears or bias toward short-term thinking drive our decisions, it’s hard to tell the difference. We confuse action with productivity or progress. When we’re anxious about a complicated situation we often rush to do something – anything – even without that action being part of a coordinated plan.

Several years ago a retired couple fired us less than a year after we began work for them.

They were both intelligent people, but there were some pretty massive differences between their assets, goals and expenses. They came to see us after their net worth had dropped by more than 60 percent. The price of a single stock that comprised most of their investment assets declined more than 75 percent.

Their living expenses and overhead, however, were built around the higher asset level. Their net worth declined, but their spending didn't.

Neither did their expectations.

We designed a long-term plan that gave them a chance of changing the trajectory of their fiscal health. Otherwise, their assets were going to last only about four more years. The plan involved a reallocation of the assets and asset class mix; the planned liquidation of some real estate; and a significant adjustment in their monthly expenditures.

They fired us after nine months in which their stocks outperformed the S&P 500 and their total assets exceeded our plan.

Despite agreeing to a plan that allocated their assets across multiple asset classes, they were upset that not all of their money was in stocks. Since stocks went up, they wanted more stocks.

So off they went, likely in search of the next Google or Apple.

Or perhaps the next IPIX or Idleaire.

Investment performance over a period as short as nine months is as much a matter of luck as anything else. Fortunately, they enjoyed good luck over their first nine months with us. The opposite could have easily occurred.

Their specific situation required a multi-faceted plan. It incorporated a spending adjustment, asset reconfiguration and keen attention to risk; they couldn’t survive another 25 or 30 percent decline in their assets.

There are situations and places in life that almost beg an individual to take massive concentrated risks.

Most 71-year old retirees are not at that place.

A home run might have saved them, but even Barry Bonds only hit a dinger once in every 13 at bats. And he was on steroids.

This couple was not on steroids.

I don't know what happened to them. They live out west and it’s been years since I've heard from them. My guess is that they've changed advisory firms a few more times and eventually began to make some of the asset shifts we recommended.

Or they made a zillion dollars in Apple and they are sitting in Palm Springs laughing at me and the silliness of planning.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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