Column: Beware of auto-pilot investing


Commentary by Joe Clark

For most people, plane travel feels like a seamless experience– same plane, pilot and crew – just a new location upon landing. However, flight crews experience three distinct phases of a flight: boarding, beverage service and landing preparation.

Similarly, average investors often perceive a “seamless” experience when it comes to retirement planning, focusing their attention on their statement’s balance.  With an auto-pilot-focus on the account balance, investors often lose sight of three different investment stages that need to be managed during the retirement journey.

Phase 1 is accumulation, where investors save money. Here the primary goal is to save the correct percentage of income and build tax diversification. That means the investor’s nest egg shouldn’t all be directed to a 401k plan. The goal is to include tax-deferred, tax-free and taxable accounts in the retirement plan.

Phase 2 is preservation. Although saving may still be occurring, the amount being invested becomes secondary to preserving the nest egg. This is the only phase where the average investment return truly matters.  Investors need to exercise discipline when dealing with seasons of volatility and resolve to stick with their decisions.

Phase 3 is distribution. This phase requires relentless attention to volatility. Investors must be aware of the tax treatment on every dollar needed. If an advisor mentions “average investment return” during the distribution phase, investors should end the conversation because the advisor clearly doesn’t understand math. Taxation and volatility are paramount in landing the investment plan safely.

Investors like to focus on average returns, but markets don’t move in straight lines. When distribution occurs, the withdrawn funds are never replaced in the account. The term “average return” doesn’t take that fact into consideration, so an investor’s experience could be much better or much worse than the average return. This reality is readily observable when people invest during stock market pull backs, but it is often forgotten during the withdrawal phase.

There is an art to safely landing a plane just as there is an art to distribution planning.

Joseph “Big Joe” Clark is a Certified Financial PlannerTM and the Managing Partner of the Financial Enhancement Group, LLC, an SEC registered Investment Advisor.