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I watched a bit a marathon of “Say Yes To The Dress” from TLC last week.

As a financial planner, my first reaction to the show was wanting to scream “DON’T WATCH THE SHOW!” as it will skew your perception of how much a wedding dress should cost.  I don’t think I saw a budget less than $3000!  And all for what?  One day of make believe and grand delusions?  Ask yourself, do you remember what dress the brides wore at a wedding you have attended 2 years ago?

To be fair, the whole show is not completely without merit.  After a few episodes I started to see how the process of choosing ‘the right’ dress can be a metaphor for making any emotionally charged financial decision.  I see many of the same pitfalls arise every day as a financial planner.  There were :

  • those who want everything but aren’t willing to pay the price
  • those who are looking for the ‘perfect’ dress and so afraid that they will regret their decision that they don’t make any decisions at all
  • those who love everything and can’t decide

The show is set in Klinefield’s, a ‘mass affluent’ bridal store in New York.  In one episode Randy, the fashion consultant, told us his cardinal rules about wedding dress shopping which I think are rules we can follow anytime we are making other large dollar, emotionally charged financial planning decisions in our life:

1. Don’t try on a dress outside of your budget, it will only lead to tears – isn’t that so true?  Our wants will always outpace our needs.  Even in the dream factory that is Klinefield’s the first rule is not to temp yourself.  Life would always be easier if you had more money, but if you don’t have it then why tempt yourself? This is where understanding how much money you have and can spend will keep you grounded.  As I’ve said before, you need to be realistic…and Think Poor. Live in the bliss of ignorance.

2. Don’t keep secrets from your consultant –  Yes, they want to sell you something, but they also want you to be happy, even if for no other reason that you will come back they can sell you something else.  Just remember the advice you get is only as good as the information you provide.  If you tell me you have no debt and want to retire at 65, my advice to you will be very different than if you have lots of debt and you want to retire at 55.  So don’t waste your time and the time of your advisor if you are not going to help them to be successful in helping you.

3. Leave the entourage at home – Don’t be surprised if everyone has a different opinion of how to achieve financial success; too much advice is not necessarily a good thing.  Reading all of the financial blogs and books isn’t necessarily going to help you (except this one of course). It may sound cheesy, but a better way to spend your time is to get to know yourself and what your goals are.  There is always a financial solution out there to get to your goals…just as there is always a dress out there for you. The trick is finding the dress or the financial plan that you can afford and that you can live with.

4. Stop shopping once you found the dress – The fundamentals of financial planning are actually pretty simple and universal.  You will need a tailored plan to suit your needs, but once you have plan, stick with it.  Stop trying to find the ‘better’ plan.  Changing course and second guessing yourself won’t help you and will only cost you more money if you make rash corrections to your plan over the short term.

5. Always wear underwear – Well that goes without saying… you never want to be naked at Klinefield’s or in your finances.  Make sure you always have a rainy day fund that is separate from your other accounts.

I would add one more cardinal rule:

6. Keep some perspective on what is really important – In many ways the rush and excitement of the wedding dress purchase is like the initial stages of your financial planning. Wrapped up in each stock purchase or mutual fund selection are all the hopes and dreams of your whole life, career, family and retirement. The wedding dress encapsulates everything brides dream about their marriage. But the dress itself is for just one moment in time.  It’s a lot of work and done right it can be the foundation of something wonderful but it isn’t the marriage. Try to think of your financial planning as if you are buying that wedding dress and planning for the entire marriage that comes after it. Just like in marriage,  the real return on your investment comes from years of hard work, communication and self-reflection.

So say yes to the dress or to your financial plan, but remember these rules to keep your head out of the clouds.

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I just read another article about returns.  I don’t understand why everyone out there is constantly summarizing  different ways to calculate returns when there is only one way that matters to you as an investor.  While it is important to understand how other returns are calculated the average investor really only cares about their own returns.

To summarize, there are basically 3 ways to calculate returns:

  1. Regular rates of return – this should be used for quick summaries usually. It is computed as (End Value – Total Contributions) / Total Contributions.  Can be annualized to calculate actual returns if no additional contribution is made after the initial contribution.
  2. Time Weighted Returns – Used by mutual fund companies to remove the effects of  individual investors moving their money in and out.  Calculates the ‘pure’ performance benefit that advisors bring.
  3. Dollar Weighted Returns (you should use this one!) – Internal rate of return (IRR)  calculates returns taking out the effect of when contributions were made.

This info sheet (pdf) has the clearest explanation I have found  of how these calculations can provide very different results. And it doesn’t require wading through overwhelming math like most explanations.

Because IRR is the only way to take out the effect of when funds arrive in the account, it is the preferred way to calculate your individual returns. This is especially true for those of us who use dollar cost average.  Since the only way to compute the IRR is to track when you put the money in, you will need a spreadsheet to help you and you will need to input numbers often.  I’m not too concerned about getting the returns down to the day so I use my quarterly statements to calculate how much I contributed for the quarter and annualize that value (note in Excel you need to calculate -IRR not IRR or you will be getting the negative of your return).

Since I’m tracking my returns quarterly, I also use it to tell me how much my portfolio should be worth if I were getting the return I want on my portfolio  (you just do compounding on the contribution and add them up) this way I can see in one shot if I’m meeting my expected return or not and if not, how far am I off.  I use this to adjust how much I need to top up my contribution to my investments.

In the end it is the final dollar figure that I really care about.  All of the talk about math is inconsequential.

Comment if anyone is really interested in how the excel spreadsheet works.

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