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When people find out that I am a financial advisor, the first question I am usually asked is “What should I invest in?” or something close to that.  My answer is almost always the same, “What is it you are investing for?”  If your advisor is telling you what to invest in, before you have talked about what you are investing for, I highly recommend you find another advisor.  When I think about investing, I often think back to my military education days and learning about the three levels of war; Strategic, Operational, and Tactical.   Understanding how each of these levels work and how they relate to and drive each other can be directly applied to planning for your retirement or any other investment goal that you have. 

At the top is the strategic level.  At the strategic level you are defining your overall goals.  If we think about World War 2, the Allies had a strategic goal of the total defeat of Hitler and Germany and restoring peace to Europe.  This is ultimately what they wanted to achieve.  When we think of investing strategically, we too, must set an overall goal for our investment.  That goal could be being able to retire at 66, with enough in savings to maintain my current lifestyle for 30 years.  You can have more than one goal; some may be more long term than others.  Strategy is what we want to achieve, not how we achieve it.  In both warfare and investing a good strategy allows you to form objectives and begin to allocate resources so that you can accomplish your strategic goal.

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Underneath the strategic level comes the operational level.  At the operational level we start forming objectives that support the achievement of our strategic goals.  To continue with our World War 2 strategic goal of total defeat of Germany we start by asking ourselves; how do the Allies defeat Germany?  So the Allies got together and said to defeat Germany, we need to make sure the Germans are engaged on multiple fronts and unable to mass their Army at any one point.  Russia was fiercely engaging the German Army in the East, so the Allies decided on a course of action of opening up a second front in Western Europe, while continuing to battle Axis Forces in Northern Africa.  So now, we have taken a strategic goal, and at the operational level identified objectives to help achieve that goal.  We can apply similar thinking to our strategic retirement goal.  Now that we know we want to retire at 66 and keep up our current lifestyle for thirty years after retirement we can estimate how much money we would need to have saved up at retirement to fund our retirement years.  We then plug in the numbers, based on what we plan on spending, inflation, etc and can determine that we will need $700,000 at retirement to achieve our retirement goals.  Now we have an objective, have $700,000 in our retirement account when we retire at 66.  You can then break this long-term objective into a shorter-term objective.  If you currently have $100,000 in your 401K and know you have twenty-five years until you retire, you can now figure out how much you need to invest/save on a yearly and even monthly basis to turn that $100,000 into the $700,000 at retirement. 

The final level is the tactical level.  At the tactical level we are now deciding on the actions that need to be taken to achieve the operational objectives.  Once the Allies settled on an objective of opening up a second front on the German Forces in Western Europe, they then put into motion a series of actions to engage Germany.  This included D-Day, which allowed the Allies to secure a foothold on the European continent, upon which they were able to bring additional forces and supplies into Northern France and conduct military ground and air operations ultimately leading to the defeat of Germany in World War 2.  Again, for investing, we want to follow a similar thought process.  What actions can I take now to achieve my short-term and long-term objectives that can ultimately lead to my definition of a successful retirement?  This is where you start selecting the investment vehicles that are right for you, based on your risk tolerance, objectives, goals, income, assets, expenses, etc.  There are a lot of financial products for you to choose from, you need to choose the investment product that gives you the best chance to achieve your objectives, at a level of risk that you are willing and able to handle.  For example, a bond might be a sound, safe investment that is recommended to you.  However, if you are thirty and need your investment to grow at a high enough rate to support your retirement in 36 years, you are unlikely to be able to meet that goal through bonds alone.  The investment itself might be tactically sound, but it is strategically wrong for that young investor.  To know which tactical investments and decisions you need to and should make, you must first understand and define what you want those tactics to accomplish.

Now, I am being overly simplistic with my examples, but what I want to get across is how you need to start at the top and define what it is you want to achieve before you can plan what to do.  If the Allies had started by invading Northern France without a clear idea of what that action was to achieve, they just as likely would have stopped or changed course after meeting resistance on the beaches at Normandy.  Of course, the Allies did not stop, because they recognized how these tactics were working towards their objectives and would ultimately achieve their strategic goal.  You need to approach investing and retirement planning in the same way.  Define what you are investing for, set objectives that support your goal, and then pick the right vehicles to reach the objectives.