Financial Planning

Working with a Certified Financial Planner (CFP) will help you develop an effective financial plan.

Personal financial planning focuses on you as an individual – bringing together all the financial and psychological factors that have an impact on your life.

A well-designed financial plan will help you reach your personal financial goals and objectives, and give you a greater sense of security.

Many people call themselves financial planners, but the true professional financial planning practitioner uses the Total Financial Planning Process, which is made up of six distinct steps.

  1. Helps you clarify your present situation by collecting and assessing all relevant financial data – assets and liabilities, tax returns, records of securities transactions, insurance policies, wills and pension plans.
  2. Helps you to identify financial and personal goals and objectives, and also to clarify your financial and personal values and attitudes.
  3. Helps you to identify financial problems that can create barriers to your financial independence.
  4. Provides you with written recommendations and alternative solutions. These should be structured to meet your needs without undue emphasis on purchasing specific products.
  5. Assists you to implement the right strategy to ensure that you reach your goals and objectives.
  6. Provides a review and revision of your plan to ensure that you achieve your goals.

How do you know if you need to work with a Certified Financial Planner?

People hire financial planners for many reasons. These questions may help you decide if you need professional financial advice.

  • Do you have the time to attend to your personal financial affairs?
  • Are you confused about conflicting financial advice from several sources?
  • Do you feel you are paying too much tax?
  • Are you confused about where to invest your money?
  • Do you feel that you can’t make ends meet?
  • Do you feel that you can’t save any money?
  • Has there been a recent change in your life that could affect your financial future, such as retirement, job loss, an inheritance, an addition to your family, or loss of your spouse?

For more information on our Financial Planning Strategy contact our office.

Asset Allocation is Key

What is the Modern Portfolio Theory?  Asset allocation is the process of determining how your investment portfolio should be invested among the different asset classes, based on your risk tolerance and your financial goals. It involves diversifying or spreading your investments across these asset classes in order to maximize potential returns while minimizing risk.  Simply put, it is the practice of keeping your eggs in different baskets.

Of course in financial matters we are not dealing with eggs.  Instead we are dealing with money.  And to be specific, with money we are dealing with investments in particular.  Investments come in three basic types or asset classes: Stocks, Bonds and Money Market.

There are also several Non-Core types of investments like Real Estate, Resources and other high quality private investments that exist outside of the typical public offerings.  Basically the principal of diversification says that you should have a little in each of these to diversify yourself against risk of the stock market and whatever else might happen in life.

If all your money is invested in one sector of the economy or one region of the world, your investment returns are completely tied to its performance.  By spreading your money around in investments of various kinds (for example – lower risk and high risk; short term and longer term; blue chip and smaller companies), you reduce some of your risk because gains in one area can offset losses in another.  Over the long term, markets over-all have increased in value.  This is the principle behind asset allocation.

The First Step to Asset Allocation – A Plan

Since asset allocation has such a tremendous impact on investment returns, it underlines the fact that developing an investment plan – one that is diversified, and compliments both your investment goals and personal comfort with volatility – is the vital first step in your personal investment strategy.

Once you know what you want to achieve and when, you can decide how to achieve it by selecting the investments that work for you.  Asset allocation helps you create a personalized investment portfolio that manages risk without unduly diminishing returns.  Asset allocation provides the potential for maximum returns with the level of risk you’re willing to accept.

The Efficient Frontier – The Strategic Approach to Asset Allocation

Modern portfolio theory was introduced by Dr. Harry Markowitz with his paper titled Portfolio Selection.  This paper appeared in the 1952 Journal of Finance.  Thirty-eight years later he shared the Nobel Prize in economics with Merton Miller and William Sharpe for what has become a broad theory for portfolio selection.

Prior to Markowitz’s work, investors focused on assessing the risks and rewards of individual securities in constructing their portfolios.  Standard investment advice was to identify those securities that offered the best opportunities for gain with the least risk and then construct a portfolio from these.  Following this advice, an investor might conclude that railroad stocks all offered good risk-reward characteristics and compile a portfolio entirely from these.  Intuitively, this would be foolish.

Markowitz formalized this intuition.  Detailing the mathematics of diversification he proposed that investors focus on selecting portfolios based on their overall risk-reward characteristics.  In a nutshell investors should select portfolios not individual securities.

Portfolio Selection

An investor’s choice of portfolio should be made based on the level of risk/volatility that the investor is willing to accept.  Remember that equities tend to be more volatile than either bonds or money market investment.  So the higher level of risk and volatility that you are willing to accept – the higher the level of equities that your portfolio will hold.

Diversification of your portfolio should not only consider asset class, but also other items, like market capitalization, consistent revenue, solid cash flow, consistent book value, solid dividend or distribution history, geographic regions, economic sectors, management style and investment style.  The goal is to increase your returns while at the same time minimizing or even reducing volatility relative to the underlying benchmarks.

What next? Stick to the plan!

Once you’ve made your asset allocation decisions and have selected investments that fit your plan, the majority of the hard work is done.  Instead of worrying when a particular asset class flounders, you can rest at night knowing that this volatility has already been accounted for in your investment plan.

By re-balancing the portfolio on a regular basis, asset allocation ensures that a hot investment does not take you beyond your tolerance for volatility.

How many people do you know who panic and sell their investments after they drop in value, only to buy the latest hot performer? They are buying high, and selling low – the exact opposite of what you want to do.

Asset allocation preaches time, patience, ease of management and long-term results; it is a balanced and rational approach designed to bring some order to an unpredictable economic environment.  Once implemented, the primary virtues required of the investor are the patience and discipline necessary to stick to a plan.


For more information on our Investment Planning Strategy contact our office.