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On Wednesday, March 11, I launched the inaugural event of my Financial Road Map Series teleconferences.

I want to thank each of you who stopped by to listen in to my brief discussion on taking control of your financial future by controlling what you can.

To recap the important points we discussed:

1.) Control What You Can:  No sense in worrying about things that are beyond our individual control.  There’s plenty enough for us to handle and impact directly.  Things that you can control can include:  Your saving and spending habits, your health and exercise programs, your asset allocation, your investing costs, and most importantly, YOUR ATTITUDE.

2.) Have SMART Goals:  Begin with the end in mind.  Be Specific with Measurable goals that are Attainable and Realistic and tied to a specific Timeframe.  It’s one thing to say “someday I want to be rich” or “someday I want to own a boat.”  But if you can put a number to that vision, your mind’s eye can picture it as reality and it becomes a real target to shoot for.

3.) Understand Your Risk:  These past seventeen months have tested what it means to be an investor.  It has highlighted the reality that most individuals do not have a handle on their own risk appetite.  Understanding risk is more than simply answering a few questions on a form.  It involves an open and honest conversation with yourself, your spouse (significant other) and your advisor. Go beyond the standard form and consider what does money mean to you, how your family treated money, what has been your best and worst financial decision and how you came to those decisions.  Ask yourself (or your advisor should ask) how you feel about these risk attitudes.  You may even want to consider using an impartial tool located at www.riskprofiling.com to provide additional insight into your risk tolerance.

  • NOTE: In my practice I utilize multiple risk profile formats to get a handle on how a client thinks and what motivates a decision.  This is helpful to be able to better communicate with a client. 

But having an honest conversation is also integral to proper investment planning.  For instance, I can use the standard risk profile tools, my questions and the website tool listed above and determine a Risk Capacity Measure for a client.

A person who has verifiable emergency reserves (3 to 12 months depending on their particular circumstances), has a positive cash flow and net worth, low debt ratio and adequate life insurance in place has a capacity for higher risk than someone not demonstrating these attributes.  For someone lacking these attributes, the financial plan will likely focus on improving these measures before investing in something risky.

4.) Have an Investment Road Map: Most people would not go on a trip without a map or GPS.  The same should be true about investing.  Having a road map (called an Investment Policy Statement) is something that professional investors like pension funds, insurance companies and endowments use all the time.  It outlines the end result desired (for instance, growth of capital with the investment generating $X in income per year), the types of investments that will be considered (i.e. no investment in nuclear power or tobacco), and the criteria for determining when to buy, when to sell and what to replace it with.  This helps take the emotion out of investing and avoids having a long-term plan sabotaged by the chatter of “talking heads” either in the media or at the office water cooler.

5.) Risk Allocation:  You don’t need a graduate degree in finance to understand that some things just make sense.  More than ever the old adage makes sense: Don’t Put All Your Eggs in One Basket.  While it is true that all asset classes have lost value from their peak nearly 18-months ago, that is no reason to give up on the wisdom of diversification. Just because someone doesn’t win a race the first time doesn’t mean you give up running ever again, does it?

But let’s be sensible about this.  Having a target risk allocation (based on investor age, timeframe until goal, risk capacity and risk tolerance) does not mean simply that you “buy and hold” or “set and forget.”  While academic literatute indicates that a buy and hold strategy will win out over time, in reality most investors do not have the stomach for the occasional and frightening roller coaster rides that happen like they have recently.  In which case in makes sense to buy, regularly and tactically rebalance while exploiting short-term trends and hold cash.  (Most investors do a poor job at following trends, implementing a disciplined trading strategy without emotion and sometimes having to go against the grain and do what seems uncomfortable like buying when everyone else is selling).

6.) Control Your Costs and Your Investment Vehicle: Invesment costs can weigh you down like an anchor.  And choosing the right investment vehicle helps you ride in comfort to your destination. 

Consider this:  Not all mutual funds are created equal.  Actively managed mutual funds have costs that detract from performance.  And typically more than 50% of active mutual funds do not match much less beat their benchmark index.  Does this mean that you give up on investing?  Heck, no. It just means you find another ride.  When a star football player gets hurt, does the team forfeit the remaining games?  No, they have a back up ready for replacement.  With a solid investment policy and using ETFs, you can make a quick switch, too.

This is why you should consider a strong core of index mutual funds and Exchange Traded Funds (ETFs) as part of your investment stratetgy (see “Top 8 Reasons to Use ETFs in Your Portfolio,” March 10 blog post).

7.) Estate Planning is for Everyone: Be prepared.  That’s the motto that every Boy Scout knows.  It’s good advice here as well.  Having the best investment strategy and record-breaking performance on investments will mean absolutely nothing if you’re not on a strong foundation.  This is what an estate plan will help do by laying the groundwork on how you want to control disposition of your assets and control your affairs.  Regardless of age or portfolio size, an estate plan is important throughout the various stages of life.  This goes for seniors and newly married couples.  If you have something or someone to protect, you need to talk with an attorney to draft a plan that includes at the very least: a Last Will, a durable Power of Attorney, a health care directive.  And if you have minor children it is imperative to have your guardianship issues addressed.

8.) Insurance: In uncertain times, it is even more important to make sure that you protect yourself from contingencies that can blow up your plans and get you off track.

Please review these items annually.  Consider putting it on your calendar to coincide with the seasonal change for clocks.

  • Make sure you have full replacement coverage on your property
  • Add an “umbrella liability” policy to your home and auto.  In a litigious world you don’t need to lose everything because of a lawsuit.
  • Make sure you have filed a “homestead declaration” recorded at the Registry of Deeds on your primary residence.  This will protect you from creditors placing a lien on your property that could force you to sell to settle a suit.
  • Review your employer-sponsored benefits and consider group Long-term Care Insurance, Short and Long-term Disability and Supplemental Accident coverages in addition to standard health/vision coverage.
  • You really need to consider coordinating these coverages with individually owned policies because when you leave your employer you will lose these coverages. 
  • Life Insurance:  Do speak with a financial planner who will do a detailed expense analysis to determine the appropriate level of insurance.  This approach is more likely to result in an appropriate level of insurance at a lower cost than rules of thumb based on income.  As with employer-benefits, consider having policies separate from your work.  A level-term policy is relatively inexpensive and offers cost-effective coverage during the peak years when you may have considerable debts and family responsibilities.

For specific advice on any of these matters, please consider speaking with an independent board-certified planner.

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After a marriage breaks up, about the last thing most people want to do is sit down with one more attorney. But no matter how old you are or whether you have kids, it’s important to consult both financial and legal experts to make sure you have an updated estate and financial plan for your new life once the divorce decree is final.

It’s also best to blend estate planning with financial planning post-divorce. If you weren’t working with a financial or estate planner during the divorce process, it’s time to do so now. The immediate months after a divorce can be disorienting – even if you don’t move, you are literally starting a new household that you will have to direct yourself, and that means new money issues to face.

This is why the weeks immediately after a divorce are a good time to revisit short- and long-term spending and planning goals. Here’s a general road map to that process:

Start with a financial planner: Whether you plan to stay single, remarry or move in with a new partner, it’s good to get a baseline look at your finances as early as possible after the divorce is final.  Expenses for the newly single can pile up quickly and unexpectedly, and a financial planning professional can help you review your new current spending and savings needs, compare strategies to achieve long-term goals like college and retirement and give you critical tools to protect your assets and loved ones if you die suddenly. Even if you have a good relationship with an ex-spouse and you addressed key issues for your children as part of the divorce proceedings, you need to revisit all these issues as a single individual before you move on to the next stage.

Talk with a trained estate planning attorney about wills and other critical documents: True, there are software programs and other kit solutions available to write basic wills, powers of attorney and certain simple trust agreements. But it makes sense to coordinate the activities of a financial planner with an estate planning attorney who can tailor an overall estate plan specific to your needs no matter how basic they might be right now. Even if you are very young with few assets, it makes sense to get some solid advice in this area so you’ll be able to manage such planning as you age and your finances get more complex.

Particularly if you have kids, such planning is important if you plan to remarry and if you want to guarantee that specific assets are guaranteed for them when you die.  In some cases where a spouse dies unmarried with minor children, an ex-spouse might automatically gain control of assets that were supposed to be earmarked for the kids. If you don’t want that to happen, you need to plan for that legally.

Make a guardianship game plan for your kids: It’s not enough to plan how money and assets will go to your children if you or your ex-spouse die suddenly or are incapacitated.  If your children are minors, it’s particularly important to make sure you and your ex-spouse have a guardianship plan for their upbringing as well as any assets they may inherit. You might completely trust your ex-spouse’s new husband, wife or partner to raise your kids if your ex-spouse dies before you, but there may be others better-equipped to do so – spell that out now.  Also, if there are any trust or wealth issues that will become effective for your children once they reach adulthood, it’s also important to establish an efficient legal structure for distributing those assets as well as appointing a trustee in a will to train and guide your kids through that financial transition.

Plan for special needs kids: If one of your children is disabled and is expected to need lifetime assistance of some type, then you should consult a qualified attorney to help you create a special needs trust. It will help protect your child from having to give up any public or social financial assistance as well as access to special doctors, medical help, special prescriptions or treatments that could be taken away if they were to personally inherit assets that would disqualify them for these programs. When such assets are held in trust, they are not counted as the child’s assets. The advantage is that those inherited assets may still be used to support their housing or other personal living needs without adversely impacting qualifying for government aid programs.

Get solid protection in place:  Most people focus on what may happen to their health insurance if they get divorced, but insurance issues like life, property/casualty and disability insurance are sometimes put on the back burner.  If you’re newly single, you definitely need the best health coverage you can afford for yourself and your kids, but life, property, liability and disability insurance becomes doubly important, particularly if you failed to address those needs during the divorce.  Even if your ex-spouse is cooperative with financial support, it’s wise to insure yourself as if they weren’t. A financial planner should be able to go through those options in detail.

Review all your investments for primary ownership and beneficiary information: Even if you were advised correctly to change the names on assets you and your spouse were dividing between yourselves, it still makes sense post-divorce to review that the names are indeed correct on those assets, and most important, to make sure all beneficiary information is correct.

Manage Your “Windfall”:  People may mistakenly believe that that as smart as they are in other areas in life that they can make investing decisions after going through an emotionally-trying event like divorce.  It’s important to not be blinded by the suddend windfall one might receive.  There are long-term issues to consider.  And as tempting as it may be to blow off some steam with a vacation, a new car or truck or even a wardrobe, people have to think about the day after tomorrow.

That’s why it’s important not to go overboard with a little needed R&R but stash the majority of what may be received into cash to help supplement the emergency fund, cover debt service and any future moves in career or home. By meeting with a financial planner professional soon after the divorce, one can outline short- and longer-term goals to get prepared. Save any drastic changes to investment allocations or decisions to when things get settled down (maybe 3 or 6 months after the divorce is final).

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