Getting Things Started with a Financial Planner
You should have a rough idea, or work with your advisor to figure it out, what your current balance sheet and monthly budget looks like. Your balance sheet is simply all your assets minus all your debt. Your monthly budget tells you how much you can contribute toward a financial plan (or how much you need to reduce spending).
It is important to be honest with your financial advisor and give them full information on what your situation looks like. The correct path to your goals depends on accurate advice. If you don’t tell your advisor about extra accounts elsewhere, your diversification and planning could be dramatically off. Telling your financial planner doesn’t mean you have to move all the money to that person. In fact, some larger investors have more than one financial professional, each with their own specialty. But they should all know your current balance sheet in order to give advice appropriate for your total picture.
You should have a discussion with your investment advisor regarding your risk tolerance.
Most firms will give you a questionnaire to fill out that will help classify you as a conservative,
moderate, or aggressive investor. This is important in determining not WHAT you invest in, but HOW MUCH in each category. Almost every investor should have a portion of their assets in stocks, bonds, and cash, to properly diversify their asset allocation.
Your Time Horizon
Setting your time horizon correctly can determine how happy you are with your financial plan. In other words, why would you look at daily fluctuations in stock prices for a retirement goal that’s twenty years away? Studies show that both individual and professional investors who have shorter time horizons and trade more frequently, perform worse than those who make
longer-term investments. Therefore, your time horizon and expectations should be appropriate
for your goals. You should expect the stock portion of your portfolio to have a 10% decline every few years, while keeping your eye on the long-term average return of positive 10%. If you can’t sit still through a 10-20% decline, then you should check your risk tolerance and possibly adjust
your asset allocation.
Know Yourself
Knowing your own personality can make it easier for both you and your advisor to avoid mistakes. Do you like to gamble, do you own individual stocks, do you make frequent changes in your portfolio? Then you and your advisor should make a plan for dealing with those behaviors that could interfere with your long-term goals. For instance, you could set aside 5% of your portfolio for you to “play with” to trade your own stock picks.
Also realize what’s in your control and what is NOT in your control.
“My advisor and I can NOT control: The stock market, interest rates, the price of oil, etc.”
“My advisor and I CAN control: setting realistic goals, the quality of my investments, the diversification of my investments”
A sound financial plan should not depend on stocks earning 9% versus 8%, or the direction of interest rates or oil, but on your major goals which are typically many years away.
Summary
In short, remember to set goals based on your life objectives, be honest with the advisor, and focus on the things you can control. Best of luck with your goals!
