Not long ago, I visited with an older couple who had most of their retirement accounts saved in the banking equivalent of their bedroom mattress. The duo had been keeping the bulk of their money in cash since 2008, fearing market fluctuations would cause them to lose principal.

Believe it not, they thought the 2008 stock market was as high as it could ever go. They knew their cash investments were earning next-to-nothing, and they even understood that inflation was slowly eating them alive. Still, they were paralyzed by the idea they might lose some money at first.

Unfortunately, they were also stuck – stuck because they weren’t sure what to do next. They were suffering the effects of naked investing without even realizing it.

What is naked investing?

At this point, you’re probably wondering what naked investing is. Basically, it’s investing without the protection of a financial plan.

Just like we wear clothes to protect our bodies from the elements (and for modesty), we need a financial plan to protect our investments from fear, greed, and ourselves.

And, doesn’t our money deserve a plan? We work hard at our jobs every day to earn it, yet we hardly want to put forth the effort to maximize our investments and returns. A lot of times, that leads us to pursue a generic strategy with our money – one that leads to less-than-optimal results.

Here are a few examples that illustrate what I mean:

Example of naked investing: My retirement money is in the stock market because I’ve heard that’s what I should be doing.

Non-naked investing: I own a diversified portfolio with 60% equities because I will retire in four years and need an inflation-adjusted $5000/month from this portfolio.  I will rebalance back to my predetermined model each time the portfolio moves more than 2% from the model. I need to stay invested because, according to my financial plan, I need to earn 5.5% after all fees and expenses to keep my desired $5000/month income growing to keep up with the pace of inflation. I also plan to live for 30 years in retirement.

See the difference?

While it’s true both strategies have you investing in the stock market (which is a good thing), naked investing leaves you vulnerable to taking erratic action. For example, it’s easy to be scared out of the market and sell all your investments when you have no idea where you were there in the first place. On the flip side, investing with the end in mind will keep you in the market because you already know why you’re there – and why staying put will help you achieve your goals.

Occasionally, a prospective client will offer to invest money with me to “see how I do.” While I’m happy they put so much trust in me, I always decline the offer as politely as I can.

You see, I don’t do naked investing – not today, and not ever. I only help people invest with purpose, not just for the sake of investing.

Written financial plans prevent naked investing

A comprehensive financial plan built around a specific set of goals will not only tell you if you should be in the stock market, but it will tell you why, when, and how much!

Not only that, but understanding how your retirement plan works will go a long way in helping you stick with the plan. While you may want to put all your trust in your financial planner, that is usually a bad idea as well. Understanding your retirement plan will be the only thing keeping you on track with your plan during a -40% year, no matter how much you trust your financial planner.

At the end of the day, you need a financial plan for your money just as you need clothes to protect your body, shelter to protect your family, and heat to keep you warm. Without a plan, your money – and your future – is flying blind. Take control of your destiny by giving your money the time and energy it deserves.

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