3 Factors that influence your success.
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Deposits and withdrawals.
This is the hardest part, but only you can control whether you save or spend an appropriate amount of your resources to achieve your goals.
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Asset allocation.
Diversifying your investments for your personal risk tolerance and market conditions can help you grow your portfolio through compounding.
Asset allocation seeks to maximize the performance of your investment portfolio using diversification and disciplined investing. However, using an asset allocation methodology does not guarantee greater or more consistent returns.
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Sequence of returns.
Markets returns vary year by year and the order of different rates of return on your portfolio will affect your personal results. Having a lump sum invested compared to dollar cost average buying or selling will change your personal compound results over time under different market conditions. Minimizing losses during difficult markets and maximizing gains in rising markets has significant impact on your personal compound returns over time.
Each of these 3 factors will influence your personal financial results.
A personal financial plan can help you manage them to achieve success.
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3 “Myths” of Portfolio Management
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Fundamental analysis is all I need.
Just because you own a “good” company’s stock does not mean it will always perform well as an investment as a result of market and sector risks.
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Buy and hold is best for the long term.
The markets move in long cycles. Bear market periods can have significant value impact to your portfolio as investors experienced just a few years ago. A 50% loss requires a 100% return just to get even!
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Asset allocation is adequate risk management.
Diversification or not putting all your eggs in one basket is good advice. However, most asset classes are somewhat correlated to one another and react similarly. A rising tide lifts all boats, and a bad storm sinks many ships.
Tactical asset allocation (over and under weighting strong and weak asset classes) may provide improved portfolio risk management.
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4 Step Process to Dynamic Investing
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Evaluate market indicators.
Is the market risk high or low? Depending upon your risk tolerance, it is important to identify if and how much you should have invested.
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Evaluate sector indicators.
Where are the opportunities? History has shown that no asset class will always perform well. Investments are influenced by supply and demand.
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Identify your inventory.
What will you use as your investment vehicle or product for each asset class in your investment portfolio?
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Use point and figure charting.
Technical analysis methods can help identify supply and demand momentum characteristics of most investments. Use these methods to manage risk.
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7 Habits for Good Financial Management
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Know and control where it goes!
Many people are not aware of their annualized cost of living. Consider creating a budget. When you know where your money goes, you can prioritize to gain control. Monitor regularly.
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Understand your financial health condition and future needs.
Good financial decisions are made by managing current versus future wants and needs. By understanding your estimated future needs considering inflation, you can determine the combined savings and investment return necessary to meet your goals. Start young! The sooner you know, the more time you have to react, and the easier it will be!
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Establish a short and long-term savings plan for each goal.
First make sure your access to emergency reserves is adequate for your potential needs. This can be a combination of accounts and investment alternatives. For larger reserves, you can consider more investment alternatives – some without principal security. Short term investment dollars should have minimal exposure to equities if you are not comfortable with the volatility in principal value and risk of loss. Long term investment dollars may be more appropriate to expose to equities, with a higher probability of principal growth when held for 10 years or more. However, past market performance does not guarantee future results.
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Recognize the risks you face in each aspect of your plan.
Understand risks to your assets (due to investment losses), as well as income streams (lost due to death or disability). How would your emergency reserves support a variety of demands such as job loss, health care deductibles, vehicle insurance deductibles or breakdowns, and home maintenance or repairs? Develop contingency plans. If a portion of your family income is lost due to the death or disability of a wage earner, how will you deal with debt, cash flow, and future income needs? Based upon the condition of your vehicles and home, how likely are reserves needed near term?
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Develop tax strategies to legally keep more of your income.
Optimize your withholding to have access to your money all year. Save and invest tax efficiently for your unique situation. Implement gifting strategies for estate planning.
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Diversify your investments using asset allocation strategies.
Diversify by asset class and optimize your investment portfolio with strategic asset allocation. Consider tactical asset allocation to further help manage risk for changing market conditions.
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Work with an advisor - use other people’s brains (OPB).
Leverage the time, expertise, and passion of a good comprehensive advisor for your benefit.
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8 Plan Components
Your personal financial plans should address all of the relevant issues shown here. You may or may not need help or advice with all of them.
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10 reasons you need a financial plan.
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Mortality, disability or health risk.
Lost income stream to provide for your family’s needs and goals, or depletion of assets resulting from significant health care costs.
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Insight.
Knowing how to utilize your assets and income more effectively to meet your goals through good financial management.
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Opportunity & procrastination risk.
Missed opportunities for gain or avoidance of loss due to indecision.
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Market risk.
Exposure to investment principal fluctuation from market driven factors.
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Longevity.
Considering family history and medical technology, you may live a very long time in retirement. Will your money last?
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Inflation risk.
Rising prices for goods and services outpacing your investment return.
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Interest rate risk.
Exposure to principal value fluctuation on bonds as interest rates change.
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Credit risk.
The devaluation or loss of principal on stocks and bonds from default.
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Choices & reaction time.
The sooner you know, the more time you have to react, and the easier it will be. With a surplus you can take less risk, plan for wealth transfer, and spend differently.
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Control & peace of mind.
Good money managers balance current wants and needs versus future wants and needs. It is important to monitor your spending, saving, and investments, making adjustments as necessary. A plan gives you a feeling of independence.
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God’s plan includes good financial management!
It is biblical to save, plan for the future, maintain reserves, invest, and pay your debts and taxes. It is OK to be wealthy as long as we are not arrogant, greedy, lazy, and selfish with it. We are to be good stewards of what God provides to us, using these resources for our family’s needs, the ministries we support, and for the poor. Consider these (NIV) scriptures in developing your plan.
Saving is biblical.
Proverbs 21:20
Proverbs 30:24-25
Have a plan to profit.
Proverbs 21:5
Psalm 37:21
Maintain emergency reserves for your family and God’s family.
1 Corinthians 16:2-3
2 Corinthians 9:7
Investing is biblical according to Jesus.
Matthew 25:15-26
Paul tells us to provide for our family.
1 Timothy 5:8
Paul says pay what you owe to anyone, including taxes.
Romans 13:6-7
Solomon says it’s OK to have wealth, but cautions against greed.
Ecclesiastes 5:19-20
Ecclesiastes 5:10
Jesus rebukes the greedy man.
Luke 12:13-21
Paul cautions the wealthy not to be arrogant.
1 Timothy 6:17-19
God commands us to give careful thought to our ways.
Haggai 1:5-6
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