Sunday, February 15, 2009

Sunday Reflection: Financial Planning 101

In an environment where investing isn't as simple as dumping some money into a tech stock and watching it soar, it becomes even more important to find the right adviser and put together a financial plan to match your goals. Many naive investors will "chase stocks up", buy distressed companies because "they're cheap", or perform some other form of investment hara kiri.

Although the focus of this blog is to understand the mechanics of the market and occasionally look at potentially interesting stocks, picking equities to invest in is the last step of an investment plan not the first.

You should begin by meeting with a financial adviser. The first sign that they have your best interests at heart is if they get to know your current income and goals. Other important topics which should be covered before you even consider buying anything are:
  • Do they know your current financial position? Income? Expenditures? Savings?
  • Do they understand your risk tolerance?
  • Do they know your time horizons?
  • Are they aware of your goals for home ownership, further education, raising children?
  • Are they aware of your retirement time line and income expectations?
Based on this, your adivsor will start to lay out a plan for you including:
  1. Liquidity needs
  2. Risk tolerance
  3. Expected growth plans
  4. Asset allocation
  5. Suitability - Will you be able to sleep at night?
You also have to understand that these advisers are usually in it to sell their own products. Unfortunately, many of them are sales staff first and investment planning professionals second (and you want it the other way around). You also have to be careful of conflicts of interest which they may not disclose openly (although they are supposed to). For instance, if they recommend a stock, how is their commission structured? Identifying how they are paid will make it clear how you can best use their advice. After all, they have to be paid something to compensate them for their assistance.

If you ask the right questions, you will feel more confident about the advice you receive and if you pick the right advisor they won't mind a collaberative approach to the mutual success your partnership will create.


Steve said...

Hey Josh,

If I have a very short term investment horizon (1-2 years before buying a house) do you think I would benefit from meeting with a financial advisor?

Or does it make sense for me to just hang onto cash until I'm ready to take on home ownership?

My thought it that with such a short time horizon my risk tolerance is too low to even bother. I'll be interested to hear what you have to say.


Joshua Wong said...

What a timely and relevant question.

I saw your question and had so many ideas swimming in my head that I wrote an entire post dedicated to your question.