Most families try to focus on efficient and effective ways to build wealth and protect it from being eroded by taxes, inflation and market fluctuations.
One of the secrets to a good financial plan should be to concentrate on meeting your personal, predetermined needs and objectives. This task will involve number crunching in relation to the estimation of future interest rates, growth rates, inflation and your current requirements projected into the future.
The goal is to ascertain how much additional capital you will require to provide for this future income requirement. Investors can choose to do nothing, or very little planning, or they can review plans on an annual basis.
The results will be devastating. Families in this category usually have no control over their financial lives, and regularly find themselves in debt. They will never have any financial security or peace of mind. They will suddenly wake up close to retirement when it is too late to plan their financial future.
A large section of the investing public fall into this category and they always tend to be one step behind where they could be. This type of investor does not fully appreciate what they are trying to achieve. They make decisions based on once-off investments and, as capital or additional monthly funds become available, they look for a place to invest without considering exactly how this effects other investments already in place.
Not looking at the whole picture usually leads to far too little diversification or a totally unbalanced portfolio. Portfolios could be diversified but with too large a percentage in one asset class.
I was recently consulted by a client who had 26 different policies, retirement annuities and unit trusts.
When I analysed where the money was invested, I discovered that more than 86% was invested in equities. The investor would not even know, because the assets are all invested through various different policies. It is not something that most investors look at in the same way as they do when they have their own segregated portfolio.
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The ideal investor is one who identifies and separates needs from wants. The starting point in financial planning is to fully understand what your short–, medium– and long– term requirements are. The following are a few areas that the organised investor has fully considered:
- Protection for your family in the event of death
- A plan should you fall ill or become disabled
- Creation of wealth
- Saving for a home
- School and university fees
- Family celebration (barmitzvah, wedding)
- Estate planning
- Retirement planning
- Tax planning.
Only once you have taken care of your basic needs should you start to plan for all those things that bring pleasure to life. As your circumstances change, so you need to revisit your financial plan. By doing this you will move from the disorganised to the organised. There are a few things I have learnt over the years:
- Don’t make any investment decisions unless you know how they fit into your puzzle.
- Revisit your whole plan at least once a year.
- Keep all your financial records in a safe place and ensure your next of kin know where they are.
- Understand the risks associated with each investment.
- Know which investments you are hoping to draw income from and which ones are there to provide growth.
Remember, greed and fear must never influence your decision-making. It is the long-term strategy that must determine your investment decisions.