Risk
It is important for you to understand your tolerance for risk and capacity to recover from investment losses. Financial professionals need to understand this also. It is part of the understanding needed to help develop a foundation to guide you through your life’s journey.
Risk tolerance is your capacity to withstand a loss. Your capacity to withstand a financial loss is your ability to recover from or absorb a financial loss and still be able reach your financial goals. If the probability of an investment portfolio is too low, then the person does not have the capacity to withstand the loss.
If you do not have the tolerance or capacity to withstand a loss, something else may need to be changed. It may be any combination of actions including: increasing income, lowering expenses, increasing savings, or lowering financial goals.
The reliability of your sources of income is another factor to consider. If have a good job with a strong reliable company in a growing industry, you are in a better position to withstand investment losses. However, if you are not satisfied with your employment you are not in as good of a position to withstand investment losses.
Age and health are two other factors to consider. If you are in the earlier stages of you career, you have more time and resources to recover from investment losses. The existence of health issues generally reduces the ability and flexibility to withstand losses.
Future plans to start a new business and to travel extensively are two other factors to consider. These plans may reduce your ability and flexibility to recover from investment risks.
This discussion is an introduction to an understanding of your risk tolerance and capacity. Without this understanding, your financial planning may not be achievable.
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Tips for selecting a fianncial professional
Linda Stern (Reuters) provided some tips for getting help selecting a financial planner and/or adviser in her August 4, 2013 column in the Chicago Tribune.
The first part of the article summarizes the battle that has been going on since the 1990s to impose a requirement that all financial planners and/or advisers put their client’s interest first. The point she was making is that you should not wait until Congress decides who should be covered and by what standard as an excuse for not getting help with your financial matters.
“If you are getting your financial advice for free, you are not getting an adviser who is putting…” your interest first. “Smart and unconflicted financial advice is worth something…” Many of us provide guidance, support, etc. for those that want to manage their financial matters themselves.
“Look for the term ‘fiduciary planner’.” Until Washington waters it down, it means the adviser has to make sure your investments are the best possible investments for you.” Those that have the Personal Financial Specialists Credential (PFS) had to establish they had the specified experience, specified education and successful completion of the required examination. As a member of the AICPA, we are also are subject to the AICPA Code of Professional Conduct. CPA/PFS professionals must maintain objectivity and integrity, be free of conflicts of interest, and shall not knowingly misrepresent the facts. Some believe these requirements are the essence of the fiduciary duty.
“Regardless of where you get your advice, make sure your assets are held in a bona fide brokerage account insured by the Securities Investor Protection Corp. “
Bottom line is that you should not delay planning. Delays can limit you alternatives and require more effort to reach your financial goals. You should also do your due diligence in selecting a professional to guide you through the process.
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“Simple Ways to Stop Doing Dumb Things with Money”
Carl Richards spoke at a conference I attended this year. I decided to read his book, “The Behavior Gap – Simple Ways to Stop Doing Dumb Things with Money”.
The book does not attempt to provide a simple way for people to achieve their financial goals. It provides observations to show how to avoid doing dumb financial things. Start by taking “… a deep breath and reflect on past decisions.” Identify actions you took or did not take that did not turn out as you expected. Identify how you can make better decisions in the future.
You need to recognize that not every decision will be perfect. Recognize where you are and where you want to be. Stay “…in tune with reality, with your goals, and with your values.” You will need to move forward and recognize what changes are needed to reach your goals.
Following is a small sampling of key points he makes in the book:
“We can stop chasing fantasies. We are not going to get what we want by beating the market or picking the perfect investment or designing the perfect bulletproof financial plan.”
‘Our assumptions about the future are almost always wrong.” “…we can take sensible steps to protect ourselves from life’s inevitable surprises.”
“Your financial decisions should align with what you know about yourself and the world”.
“The process of financial planning is vital” not the financial plan.
“Our objective is “…to do the best we can and move forward. “
The author does not claim that his ideas are original. His goals are to clarify or simplify to give the reader the confidence to improve their financial decisions.
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Most under 45 underestimate their life expectancy.
This was the finding of a survey by the Society of Actuaries, as reported the Financial Advisor Magazine August 1, 2012.
Many people forget that the average represents the middle. That is half will live longer and half will not live that long. The life expectancy for newborn American males increased from 66.6 years to 75.7 years between 1960 and 2010. During the same period the life expectancy for newborn American females increased from 73.1 to 80.8.
A majority say they would be very or somewhat likely to make significant reductions in their living expenses if they thought they would live 5 years longer than they expected. “More than half of per-retirees would also use money they otherwise would have left to heirs or downsize their housing.”
The survey also found many underestimate their planning time-line when making major financial decisions. Retires generally look 5 years into the future and per-retirees look 10 years into the future.
The report concludes this can result in underfunding for retirement. Understanding the increased life expectancy, the current state of the economy and the volatility of the stock market require people to do a better job of managing their finances and planning for retirement.
