Can Financial Planning Save Us from Bubbles?

I found a great article on the Journal of Financial Planning website today titled,"Can Personal Financial Planning Save Us From Bubbles?", written by Professor Conrad Ciccotello at Georgia State Univ. It provides another great advantage to financial planning rather than pursuing the hottest investment trends regardless of goals or personal consumption needs.

The premise is that investors, even smart, professional investors, tend to conform to herd mentality and the headlong rush into a particular asset class helps to create financial bubbles, whether its the dot com stocks or housing bubbles. Because bubbles always burst, much to the detriment of investors and the broader economy, keeping them from inflating in the first place is always the problem. Harken back to Greenspan's comments on "irrational exuberance" and how it's hard to detect a bubble when you are still in one. The alternative to following the herd mentality is to do financial planning, and let each individual's needs drive their particular investment strategy, much to the benefit of everyone involved and the larger economy as a whole. I'll let Prof. Ciccotello explain further:

So what can personal financial planning do to save us and our clients from bubbles? In short, it can provide us the discipline to avoid blindly following the pack. The key is in the financial planning process, in particular the goal-setting aspect. Your goals are yours alone, independent of any other person's goals. Logically, what others are doing to achieve their goals is not relevant to you. Staying on your path will be more likely if your goals are concrete to you, as opposed to abstract.
    
What has this professor learned over the last decade of teaching graduate students? I now spend more time discussing goal-setting before getting to calculations. Goals are the reason we invest. Investment is deferred consumption. What is the consumption, when is it planned to be, and how important is it to you? An economist would say that your goals should lead to maximizing your utility; a more concrete statement would be that your goals are what you consider important, or what makes you happy. Studies of the economics of happiness broadly show that happiness is linked to a number of factors, including family, freedom, work, charity, and faith.

Lastly, it is often argued that experienced investors are the best at avoiding market bubbles. I think experience really means goal clarity in an investment context. Individuals' investments are made to further their future hopes and dreams—that is, their goals. No one has more experience with his or her own goals than that specific individual. If the client truly owns those goals, and their implementation has been linked to a portfolio strategy, the planner has done a great service. The client will be less likely to abandon the strategy which is aimed at maximizing the probability of success for a riskier one during good times (or a lower risk one during poor times).

Great advice we can all take to heart!

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