By Walid Petiri
When talking about achieving any goal or objective our discussion inevitably involves reviewing and following the plan we have put in place. Except-not so fast when it comes to finances and our financial goals. In 2015 just 38% of investors had a written financial plan according to a Gallup poll. When the other 72% were asked, “why they did not have a written financial strategy?” The top two reason were: a) they just hadn’t taken the time (29%) or b) they simply hadn’t thought about it (27%).1
A good financial plan and strategy is like your compass as you travel along the road to your financial goals. Accordingly, the financial professional who works with you to craft and refine the plan can serve as your navigator on the journey toward your goals. Just like GPS helps to keep you headed in the right direction.
A plan provides not only direction, but also an integrated strategy to try and better your overall financial life over time. Over time this holistic approach should do more than the proverbial “make money” for you – it can place you on the path to build and retain lifelong wealth.
Basing decisions on a plan prevents destructive behaviors when markets become volatile. Impulsive decision-making is what leads many investors to buy high and sell low. Buying and selling in reaction to short-term volatility is a day-trading mentality. On the whole, investors lose ground by buying and selling too actively. The Boston-based investment research firm Dalbar found that from 1994-2013, the average retail investor earned 5% a year compared to the 9% average return for U.S. equities – and chasing the return would be a major reason for that difference. A comprehensive financial plan and its long-range vision helps to discourage this sort of behavior. At the same time, the plan and the financial professional(s) who helped create it can encourage the investor to stay the course.2
While a consistent savings discipline is the perfect foundation to build upon, saving without investing isn’t good enough. Interest rates today are hovering at all-time lows with money in a traditional money market or savings account not even keeping up with inflation. This will leave many savers at a long-term financial disadvantage.
Very few Americans retire on savings alone. Rather, they invest some of their savings and retire mostly on the accumulated earnings those invested dollars generate over time. Also in addition to saving and investing strongly consider: retiring without debt; retiring with supplemental income from either a your own business, passive rental property income, or an enjoyable part-time job; relocate to a place with a lower cost of living; and delay receiving your Social Security benefits until you will receive the full retirement benefit.
If you are saving and Investing without some planning in place, then it probably won’t be good enough. Most people invest with a general objective of building wealth, particularly for their retirement. The problem is that too many of them invest without a plan. They are guessing how much money they will need once they leave work, and that guess may be way off. Many have no idea at all.
With a plan, you can set short-term and long-term goals and benchmarks. You can estimate the amount of money you will likely need to meet retirement, college, and health care expenses. You can plot a way to wind down your business or exit your career with confidence. You can also get a good look at your present financial situation – where you stand in terms of your assets and liabilities, the distance between where you are financially and where you would like to be.
Growing and retaining wealth takes more than just investing. Along the way, you must plan to manage risk and defer or reduce taxes. A good financial plan – created with the assistance of an experienced financial professional – addresses those priorities while defining your investment approach. It changes over time, to reflect changes in your life and your financial objectives. So this month if you have not already put a plan in place then as the saying goes, “No time like the present”.
1 – gallup.com/poll/184421/nonretired-investors-written-financial-plan.aspx [7/31/15] 2 – fool.com/investing/general/2015/03/22/3-common-mistakes-that-cost-investors-dearly.aspx [3/22/15]