With all the rumblings today about the economy being in a rather volatile and unsure position, it is more important than ever to have a financial plan in hand. Why? Because you are trying to figure out the direction of your money while markets slide are all around you. Not an easy task. And to be sure, everybody and his dog have an opinion on what you should do.
What many of the top financial planners will tell you is that more people than you care to realize move their money based upon tips, or what someone else has to say should be done. You could probably do better simply throwing a dart at the financial pages and investing based upon what it hits. Actually, a number of years ago, there was a test conducted of comparing the advice of a half dozen stock brokers and an average Joe simply pasting the financial pages against the wall and throwing darts and investing in the companies hit. So, in effect, it was the experts with their recommended portfolios against the novice in a pin-the-tail-on-the-donkey scene.
If I raised this, you probably already know what happened. The stock brokers didn't do any better than the random dart thrower and in some instances (since the test was done more than once over a period of time), those inanimate darts came out ahead.
The idea really is to develop a financial plan that at least will show you what kind of investment strategy you might best realize depending upon your present stage in life and where you want to go. You can't simply rely on a particular stockbroker's "feeling" about things or even their analyses of stocks, but rather what is tailored-made for you. These are the key words: "tailor-made."
A financial plan should take a lot into consideration, such as your tolerance for risk, your investment objectives, what you save, what you don't save, your budget, your line of credit, your income, your expenses, and on and on.
The investment part is clearly a big concern and people can render a litany of advice about asset allocation and diversification but the essential ingredient really is to slot the investments against the answers to basic questions, such as:
- How much money do you realistically have to invest?
- Do you need to touch those investments in the near future? That brings up the question of what your goals are and whether you have anything on the horizon such as a child's education or a wedding popping up?
- What is your tolerance to risk? This is really about your state of mind--psychological--toward investing in general. Are you willing to ride out the highs and lows, to cut losses or to stay the course, if necessary?
- What is your present income, the potential for income, and your age? And what is it you are actually worth?
Once all of these factors are pumped into the equation, then the matter of what types of investments can be discussed and how much to put into certain kinds of stocks, bonds, money market funds, etc. But, that's the subject of another article. It all goes back to crawling before walking before running.
