October 27, 2014 | By Robert Maloney |
That’s like asking is it too late to have a relationship—because the answer depends on where you are in life. And, just like having a successful relationship, investing requires knowing what you want, being willing to jump through some hoops, and giving yourself enough time to achieve it.
Yes, the stock market is at unparalleled levels, and with ominous geopolitical events, the Ebola virus, and the pending mid-term elections, anything could spook it, sending it tumbling a few hundred points. But that doesn’t mean you shouldn’t have equities in your portfolio, if you can put up with volatility.
How do you know if you can? That’s where financial planning comes in. Although less than a third of American families have one, a good financial plan is the formula for withstanding the ups and downs of investing, as well as making sure everything else in your financial life is in order.
It starts with an honest assessment of how you feel about risk—in hard dollars. For example, how would you react if your portfolio lost 23% in one day? That happened to everyone who was invested in the stock market on October 19, 1987. Most people panicked, and fell all over themselves trying to get out, permanently locking in their losses.
But those who swallowed hard and stayed the course not only survived, but saw their portfolios recover within 18 months. But not everyone can do that. Careful financial planning can help you determine whether or not you can.
Next, a financial plan makes you ask the tough questions: How long do I need to work before retiring? What kind of lifestyle can I afford then? How will inflation affect my income needs? Are my goals realistic? What about funding my children’s education? What kind and how much insurance do I need? How do I want to distribute my assets when I die? Should my children inherit everything? And what about taxes? Am I taking advantage of all of the legal ways to keep my tax bill as low as possible? Does it make sense to pay my mortgage off? Am I overdoing it with my current spending? Do I have too much credit card debt? Am I saving enough? Is it invested the right way?
Like anything worth doing right, preparing a financial plan takes time. It also takes skill, because things change. Staying current is a full-time job, and making mistakes can be costly. And no matter how much (or how little) money you make, having a plan in place sets you up for an easier life down the road.
You wouldn’t think of going on a trip without a GPS or a map, and you shouldn’t think about going through life without its financial equivalent: a financial plan. It doesn’t have to be complicated—but it should be flexible to allow for changes in your life, the markets, and the economic landscape. And it should be revisited annually to make sure it incorporates those adjustments.
You can do it yourself—and some do. But most people recognize that the complexities of an ever-changing tax code that affects so much of your financial life make hiring a professional a better choice.
And there are three basic types of professional planners: fee only, those who charge both a fee and commissions, and commission only. And just like investing in the stock market, there’s no such thing as perfection: all have their strengths and weaknesses.
Fee-only planners will provide specific recommendations to implement the plan; planners who charge a combination fee and commissions (or only commissions) suffer from a perception of conflicts of interest. The choice is up to you.
But one thing you can count on is that a fee-only planner is paid to give you the best advice available, and to consider all available options, free of any bias. That’s because he focuses only on giving advice. Period. In addition, he will act as your personal fiduciary.
A commission-driven planner, by contrast, has a financial incentive to sell you something to earn part of his pay. Both can (and often do) produce good results. But you may rest easier knowing you’ve paid for the best advice out there—and that your planner’s only incentive is to deliver it—and that he sits on your side of the table.
Robert E. Maloney, of Squam Lakes Financial Advisors, LLC, is a fee-only financial planner based in Holderness, New Hampshire. He is an active member of NAPFA and holds a Master of Science degree in Financial Services, from the American College in Bryn Mawr, PA, and is an Accredited Estate Planner.