Financial Tatics for Life

The useful planning tool, strategy and tactics, was used first in war, not finance. Karl von Clausewitz, the great Prussian military writer, described strategy as the planning the entire campaign and tactics as the planning a single battle. So, strategy focuses on large resources to accomplish a major goal. Tactics focuses on smaller, finite resources to obtain a milestone on the way to the major goal.

Financial strategy comprises three important components: life goals that require money, time horizon for the use of the money, and risk preference to accomplish financial goals.

The investor should grapple with these three components; don’t let others decide them. It’s up to you to decide when to retire, the lifestyle you want, and how much you will save, and the risk you can accept. It is the fundamental question of life planning; "What do you want to do when you grow up?” We have experience helping people make these strategic decisions and we will guide you; but you should not ever delegate these important decisions.Financial tactics also comprise three components: asset-allocation, portfolio management and continuous review. 

Asset allocation puts your financial resources into categories of investments which differ on risk and return. The goal is to achieve your required net worth, on time, with the least risk. One way to reduce risk is to diversify holdings that are somewhat uncorrelated. If one goes down the other may stay the same or go up. Portfolio management chooses the mix of specific investments and cash to accomplish your financial strategy. Finally, continuous review monitors portfolio performance and your goals. When market conditions change, and they certainly will, the portfolio holdings must be adjusted. 

Source: Strategy Tactics article final columns.pdf

For example, if we see downward trend, we get out of the way. Also, personal goals may change; you may want to retire sooner, or fund college for two new grandchildren, or find you need less money than you thought. If your goals change, and they certainly will, adjustments in asset allocation and portfolio management must respond.

But how can you get this done? Do you want to do it yourself? Unless, you are very smart, really like doing it, have lots of time, you probably shouldn’t do it on your own. Professionals are likely to do a better job. We believe that you should let professionals manage your financial tactics.

Command and Control 

Consider another military concept, this time from the navy. The United States Navy says, "Command and control is an essential element of the art and science of naval warfare.” Command is deciding objectives and ordering action; control is monitoring progress and changing action after the engagement begins. If you use a professional to accomplish your financial tactics, you must have a way to evaluate progress to direct change.

About the same time as Clausewitz, Horatio Nelson invented command and control for the British Navy. Previously, naval commanders gave written orders to each ship’s captain on specific tactics of an upcoming battle, "Your job is to engage the French frigate, Belephon, at first light from a windward position and destroy her.” But plans often are useless in the heat of battle. 

The wind could change. The Belephon could turn out to be the larger Vérité. Often, during sea battles Nelson could neither see through the immense smoke, nor give commands over the overwhelming noise. His captains could not receive his guidance.

Further, when conditions changed in battle captains were conflicted. If a captain changed tactics, he risked his career, because he might be seen to have disobeyed orders. Even if he prevailed in battle by taking initiative, he might be seen to be unreliable. 

So there was a strong incentive for captains to do what they were ordered, even when it was manifestly wrong to do so.Nelson’s idea was to tell his captains what to do and let them adjust to circumstances; Nelson commanded the captains; the captains controlled the fight.

We can put together Clausewitz and Nelson: the admiral commands the strategy and his captains control the tactics. Think about that with your money: you command your financial strategy and professionals control your financial tactics.However, delegating does not mean losing control. You set the goal; you determine what acceptable performance is and you regularly evaluate performance. 

That’s the continuous review part of tactics.We will help assess your financial goals, and time horizon, and help you articulate the risk you are comfortable with. We can help find a middle ground when you and your spouse are in conflict. We will bring to you several money managers and financial products to help with the tactics. We will help regularly monitor your investments to respond to changes.

To get started, answer the discussion questions on the next page. Answer them by yourselves and then compare your answers. Don’t be concerned if you give different answers; men and women tend to look at these issues differently. Our discussion will help identify topics to pursue. 

We look forward to contributing to your financial future.We are happy to talk about how we help people.