Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific advice on investing your money that will help you develop a successful approach to investing. Each Investor Toolkit update gives you a fundamental tip and shows you how you can put it into practice right away.

Today’s tip: “When you want to create a financial contingency plan, make sure you don’t leave instructions that could erode your wealth.”

It’s a good idea to have some financial contingency plan in place at any age, so that someone you trust can take charge of your finances and investments if you can’t handle them yourself. However, it’s best to focus on finding someone you trust thoroughly, and giving that person as much latitude as possible.

The alternative—leaving fixed instructions—introduces a random element that can only hurt you. After all, fixed instructions (such as “If I get sick, convert all my holdings into T-bills”) won’t add to your wealth. But they may turn out to be wholly inappropriate, and whoever you put in charge won’t be able to do anything different.

Let us use the example of a specific case of a woman who, at 82, decided to make provisions for the future. She was in excellent physical and mental health, but recognized that she wouldn’t live forever. She suggested that perhaps she should sell half her portfolio if she felt she was beginning to experience doubts about her abilities, and sell all of her portfolio if she learned she had a terminal illness.

As a portfolio management advisor, I would be happy to follow any such sell direction. But fixed instructions like these are likely to mean that the person will sell at a random time, rather than at a time that makes financial sense for her and her heirs.

In my experience, when people begin to ‘lose it’, they often become excessively fearful. They might experience deep doubts simply because they watched an overly negative commentator on TV. That can happen at the worst possible time to sell — when stock prices have dropped but are close to a bottom. (In fact, that’s when the negative guys get lots of TV airtime.)

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Don’t put a limit on what your heirs might earn

As for selling everything when you learn you have a terminal illness, guesswork figures prominently in any estimate of your lifespan. If your doctor says you may only have six more weeks, he or she will probably need to add, “but you could live another one to three years or more.”

Here’s the problem: After you sell, your money will earn less than 3% a year at current low interest rates. But if, like my client, you expect to pass most of your money on to your kids, then you really should invest with their objectives and time horizon in mind. Why limit them to earning less than 3% a year from the time you get the bad news until your estate is distributed, possibly years later?

Most investors are better off to give a medical power of attorney to their most trusted family member. This power of attorney can only be exercised if your doctor agrees you are no longer mentally competent. In addition to investment and financial decisions, this power of attorney also covers medical decisions, such as choice of treatment, or when to discontinue treatment. It’s something to discuss with a lawyer.

If you don’t want to burden a single family member with this responsibility, then you might want to empower a group of, say, three people — chosen from among family members, your doctor, lawyer, dentist, accountant, family friend, or clergy, say — to act for you on majority vote of the group.

There is no neat solution to this problem that works in every case. However, any reasonable arrangement that involves family members and trusted professionals is unlikely to go too far wrong. But you can’t say that about pre-ordained decisions that may come into effect just when they can do maximum harm to your finances.

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In your opinion, what is the single most important consideration in putting a financial contingency plan in place for the future? Let us know what you think.