This article is an algorithm for Financial Planning. This, however, is NOT the six step financial planning process of policy development. Rather, it is a way to notch some trees as we move toward a market correction or disturbance, and get to a subsequent clearing …
1. Asset Allocation 2. Return
3. Risk 4. Asset Allocation
5. Sub-Class Diversification 6. Dividends
7. Index vs Managed Assets 8. Fire Drill
I have maintained that when you plan or strategize, all you need to do is stay focused on your attitude. You do have a say in your own life, get your mind around that. Otherwise, you are in a long line of victims.
I have been accused of being cynical and sarcastic by some. I prefer the title of my old lefty days, provocateur. I have many solutions based on tried and true processes. Solutions come from analysis, not from feelings reactions, impressions, impulses, lingo, confusion naïveté or a chicken in every pot.
Starting with your attitude, what is it, if you had to describe it to a nine year old? This is important because your behavior will be affected by your ‘at-ti-tude’. So clear your head – so you can take your best shot.
The word return is a wobbly word to use in assessing the results of your investing efforts. What do you want to get back? Growth, income, both, what? What do these words mean to you? What do they mean today, right now?
Risk, this is a concept you could write a book about. We are not good at defining this word conceptually or practically. Risk not = loss. Risk is losing time which is irretrievable. Risk is not attaining your goal/s. How do you define risk?
Once you have a few sleepless nights about the previous points, the next point is the division into cash, bonds and stock. How much in each in order to get to the goal? Well that is pretty hard to say. It is a function of two things, you and not you. You, you know. Not you, you don’t … know; the not you part is everything external to you, the macro-economic-political state in which we are. How lucky do you feel? How sure are you? Then more or less goes into stocks, and proportionally more or less into the others.
Given the forgoing, gross division, you have to make some distinctions in the categories. If you are a DIY’er, well you may know clearly how to compose the categories. Usually a mirror of the ‘global assets’ division is passively accepted. Deductively you follow the diversification of global assets. If you haven’t a clue, get someone to help you for a fee. Dividends will generally get you through the tough parts in market cycles. The hard part is the selection of the companies or the mutual funds that will do the right thing, give you steady to rising payments over time. This step will offer you a floor for your income at and during retirement. Even if the company’s stock price falls, the dividend may stay true. Of course, you never know; a today there is no such thing as a legacy company to pass to your inheritors.
I inferred before that you can be passive or managed, or a proportion of the two. Indexes are inexpensive. Management is costlier if there is no value added. IT is a big decision.
Lastly, do a fire drill. What is the worst case scenario? List them and think through what effect it/they will have on your future. Crucial step that too few take.
There – after this you have your own solutions. Satisfied??
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