What is “The Value of Financial Planning”?
Financial planning continues to get a bad rap …
Financial planning continues to get a bad rap. The Global Financial Crisis, poor investment returns, the failure of various financial planning firms and investment schemes, threats of further government regulation of the industry and a media that is all too willing to focus on the negative are contributing factors. As a result, many people that should under no circumstances attempt to look after their personal financial affairs have been convinced that this is the best way to go.
And for those that continue to seek financial advice, too many decisions are being made on the basis of immediate cost rather than an assessment of value. This is often because it is difficult to judge the value ahead of making the decision to appoint a financial planner. But cost may be a very poor guide to quality. And, unfortunately, it will not reflect missed opportunities, mistakes and poor decisions.
Is your investment risk strategy paying off?
Are you an intelligent risk taker?
Most investors accept the notion that risk and return are related and that those who are prepared to take on more risk will ultimately get rewarded for their risk taking. As we’ve seen with the implosion of some investments during the GFC, increased risk taking does not always guarantee higher returns, it simply exposes you to the opportunity for higher returns.
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Transitioning to your target asset allocation
How do you close the gap between your current and target asset allocation?
Our previous article, “Measuring your current asset allocation”, explained how we believe wealth accumulators (those whose after-tax earnings exceed their lifestyle expenditure) should measure their current asset allocation. It requires them to estimate their projected surplus or future capital to add to their Net Investment Wealth, to calculate a measure of total Projected Lifetime Investment Wealth.
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Measuring your current asset allocation
You need to know your current asset allocation
In our last article, “Choosing your target asset allocation”, we discussed the key determinants of the choice of your target asset allocation. But in developing an investment strategy designed to reach your target by retirement it is essential to have a meaningful measure of your current asset allocation.
For those who expect to continue to accumulate wealth from business or employment earnings, the traditional ways of measuring asset allocation are not very helpful. A better approach to asset allocation takes advantage of our “Projected Lifetime Investment Wealth” framework. It takes a much broader view of wealth and provides valuable insights relevant to answering many typical personal finance questions e.g. how much could or should I borrow, how should I build my risky growth asset exposure over time, can I afford a larger home.
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Choosing your target asset allocation
The determinants of your asset allocation choice
In our previous article, “Understanding asset allocation”, we focused on the questions “What is asset allocation?” and “Why is it important?”. In this article, we provide an overview of what is most important when choosing your target asset allocation or investment risk exposure.
At the highest level, we measure risk exposure by how your investment wealth is divided between defensive (low risk) and growth (higher risk) investment assets. In “The asset allocation decision” we explained that your mix between defensive and growth assets should be determined after a careful weighing up of the following sometimes competing considerations:
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Understanding asset allocation
Asset allocation: a measure of your investment risk
Our objective is to help clients become financially well organised and make smart financial choices so they have the best chance of enjoying the financial future they want. A key to achieving this objective is agreeing an appropriate investment risk exposure with each client and carefully managing that exposure over time. For us, this risk exposure is most appropriately measured by the client’s asset allocation.
This is the first in a series of four articles that explain our approach to asset allocation. Most people think they have a pretty good idea of what asset allocation is all about. Our experience suggests they don’t. While we start off pretty basically, we hope that by the final article you will agree that by viewing asset allocation in the lifelong context we advocate some conventional financial planning views are challenged and some smarter ways of thinking about personal finance issues emerge.
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Inheriting substantial wealth
Substantial inherited wealth can be a mixed blessing
Managing wealth can be a challenge, particularly when the wealth is inherited and substantial. The excitement of inheriting life-changing wealth is often short lived. The reality can be a life that is anything but that of your dreams.
To most, inheriting a large amount may seem like a problem worth having. Yet it often presents some unexpected dilemmas for those inheriting the wealth (and for those planning to leave significant wealth to their children). This is particularly the case for wealth recipients who have yet to independently develop their own “money maturity”.
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Concentrated investments are bad bets
Putting all your eggs in one basket may make you wealthy …
Most people are attracted to the idea of becoming fabulously wealthy by being a substantial and early investor in the next Microsoft, Google or, the latest technology darling, Facebook. But they generally understand that the chances of selecting such “winners” are slim.
However, it is not widely understood that although a large holding in a single investment has the potential to make you much richer, it is far more likely that it will result in you being worse off than if you had adopted a more diversified investment strategy.
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Living with investment market uncertainty
Uncertainty is the only certainty there is
Whether we like it or not, the real world rarely behaves in ways we expect. Our progress towards a goal is unlikely to occur in a nice linear path. Inevitably, we encounter detours and short cuts along the way, and we may experience feelings of devastation and euphoria depending on our progress relative to our expectations.
Investing is an example of the ongoing dilemma faced when reconciling our outcomes with our expectations. Given the inevitable need to invest our savings, how do we cope with the volatility and unpredictability of markets? Click Here To Read More
Personal finance basics for young adults
Personal finance literacy is acquired haphazardly
The unfortunate reality is that personal finance is not adequately taught in schools. Young people usually learn personal finance behaviours either from their parents or by doing. Not surprisingly, the lessons learned are of variable quality and, in many cases, perpetuate practices that are not conducive to developing a healthy long term relationship with money.
Clients often ask us to spend some time with their adult children, who have entered or are just about to enter the work force, to provide them with some personal finance basics. In this article, we share twelve of the ideas we discuss with our clients’ children. If they are understood, accepted and practised, we are confident that they will see money relegated to its appropriate place in the children’s life i.e. as a valuable servant rather than a domineering master.
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