The Importance of Financial Planning in an Uncertain Economy
Part 1 -Get Off the Roller Coaster and Get a Financial Plan
You may find yourself extremely unsettled by the ups and downs of the market. It has become increasingly difficult to make educated decisions on what you should do with your money. From the television, to next-door neighbors to Internet chat rooms, everyone seems to have an opinion, but how can you be sure you are getting the right advice? What can you do to ensure you make the right choices? A thought out financial plan may be the answer.
A financial plan can help you negotiate the twists and turns of the market because your investment strategy is based on your own situation and goals, not what the market is doing at the moment.
A financial plan is simply a guide to help you determine where you are financially, where you want to be and how to get there. Many people resist creating a financial plan because it seems like too much trouble until they find themselves in a pinch. If you've seen the value of your investments seesaw, now may be the time to consider the benefits of putting a solid financial plan together.You can create the plan yourself or seek a qualified financial professional who has the knowledge and experience to help guide your key decisions. A good financial plan will address more than your investments. The plan should look at all the pieces of your financial picture, including investment objectives, risk tolerance, budgeting, saving, credit, taxes, insurance, retirement planning, estate planning and more.
Since it's the investment portion of your financial picture that we are most concerned with here, let's look at some of the related questions your financial professional will ask:
- What are your investment goals? Are you saving for a long-term goal, like retirement or a child's education? Or are you looking forward to fulfilling some more immediate dream, like starting your own business or paying for a daughter's wedding?
- How much money do you have available to invest?
- How long will you keep the money invested? Can you add to your investments on a regular basis? Do you need the income from your investments for living expenses? Do you have enough cash readily available in the event of an emergency?
- How much can you afford to put at risk? In other words, what is your risk tolerance level? Partly, this is a question about your psychology of investing. But it's also a question that concerns your age, your current income, your potential income, and your total assets.
The answers to these and other important questions are the starting points for the investment portion of your plan. The next step is to outline the types of investments that are appropriate for you (diversification) and how much of each to invest in (asset allocation). Specifically, you need to decide how much to put in liquid investments, such as money market funds, how much in dividend paying investments, like bonds, and how much to put in stocks, and what kind of stocks.
Wise investors know that a diversified stock portfolio helps cushion against the ups and downs of the market. There are many different groupings of stocks. Stocks are classified by industry, by market cap size (large, medium and small), by investment style (growth, value and blended), by country (U.S., international), and so forth.
Each of these different types of investments performs in different ways. Often some segments of the investment universe will rise while others will fall. Deciding on an appropriate asset mix for your particular situation can be the most important investment decision you make.