Pasadena Financial Planner -- Pasadena, California

Your Family Financial Planning

10 Financial Planning Steps in the Right Direction

Families need an objective financial planning process. In addition, they need to be in control — whether or not they have a family financial planning consultant. With a well-designed and personal financial plan, you can optimize your financial affairs over your lifetime. You can greatly reduce the waste of your money and your time. I recommend the 10 steps below for personal financial planning and personal investment management.

To find an in depth article for each step, just click on the Sitemap link at the top of this page and look for the articles numbered from 1 to 10. You can reach us by using the contact form below. Please enjoy reading this article. Thank you!

Step 1 – Take personal responsibility

Because you must live with the results, you need to take full responsibility for your financial and investment success or failure. Delegating financial planning and investment decisions to advisers largely on faith can be very dangerous. Naive hope without adequate personal financial knowledge, attention, and control can be very risky to your personal and family welfare. The only practical solution is for you to increase your personal financial planning and investment knowledge and skills.

Educating clients about scientific investment and financial planning is extremely important to me. As such, I have written many educational materials that are of interest to my clients and the general public. My objective financial publications on The Skilled Investor website and blog are often the reason that people learn about my fee only independent financial planner and investment advisor services.

Your questions are important to me, and you should expect there to be a factual basis for any strategies and recommendations that I make. Please ask any and all of your questions, as we work together. During the course of developing a comprehensive, personalized plan for you, if you are interested, I can provide copies of educational materials that I have written and copies of original scientific finance papers that are particularly applicable to your situation.

Step 2 – Sustain a sufficiently high pre-retirement savings rate

The single most significant financial lever that individuals control directly is their management of personal expenditures. The second is their lifetime effort to obtain sufficient income. Most people simply do not save enough of their current income to fund adequately their future needs.

To analyze your financial affairs in detail, we will use VeriPlan. VeriPlan is a very sophisticated and customizable computer planning model that I have developed. VeriPlan enables you to view graphical projections of your family’s income, expenses, assets, and debts across your lifetime. Data inputs reflect your particular situation and include all your assets, including cash, bonds, equities, property, real estate, private equities, and business interests.

Step 2 is a very important step, because this is where we construct your baseline financial plan and measure your current financial circumstances and goals and intentions for the future. To develop your customized lifetime model, we will work together to gather information, adjust assumptions, and evaluate the effects of different financial decisions across your lifetime. For more information about VeriPlan, see: Personal Finance Software for Your Lifetime.

VeriPlan can vary future expected investment returns by asset class, and it automatically analyzes the details of your taxes and investment expenses. Any and all assumptions can be changed for instant “what-if” testing. The model’s risk analysis capabilities evaluate how well your future assets would cover normal and extraordinary expenses, if market or personal circumstances were to disrupt your plans.

Excessive and unnecessary investment costs can substantially undermine your lifetime investment returns. VeriPlan automatically projects the returns you will waste with such fees, if you do not choose more cost-efficient investments.

Step 3 – Always own a fully diversified portfolio

Diversification is genuinely a financial planning and investment “free lunch.” A fully diversified portfolio is a key contributor to improved investment risk management. Diversification has become an axiom of personal investing, because the specific risks of businesses and other investment entities can be reduced or eliminated from a portfolio without reducing expected returns. As such, our investment recommendations will usually focus on very low cost mutual funds and very low cost exchange-traded fund (ETF) investments.

A significant portion of a portfolio may sometimes become concentrated in a single investment entity, which increases the overall risk of the portfolio. While undesirable, there sometimes are good or unavoidable reasons for investment concentration. In such circumstances, we will provide recommendations on possible ways to ameliorate the associated risk. If there are not good reasons to maintain the current level of concentration, then we will discuss how to reduce this concentration.

Step 4 – Take personally appropriate investment risks

Investors with different levels of risk tolerance are more satisfied with investment strategies that are better aligned with their risk preferences. Differences in risk tolerances mean that more risk-averse investors are personally more satisfied with a lower risk portfolio despite its lower expected returns. Less risk-averse investors are more satisfied with portfolios characterized by higher risk and higher expected returns.

While there are a variety of approaches to the measuring relative investment return and risk preferences, we do not believe that a simple “check-a-few-boxes” survey is sufficient. Therefore, you can expect that we will discuss your feelings about risks and rewards. We will assess together your likely behavior in the face of financial risks that might actually materialize.

We will also discuss the implications of adopting a particular investment risk profile relative to that of the average investor. Furthermore, we will test the financial projection implications of your risk preferences using VeriPlan. With VeriPlan modeling your particular financial situation, you can better appreciate the projected outcomes of different investment allocations associated with your risk preferences.

Step 5 – Manage investment risk and return through asset allocation

Your risk preference relative to the average investor with the average portfolio will influence your asset allocation. Appropriately setting your personal asset allocation in line with your personal risk tolerance is a critical decision for every investor. Because the average risk-averse investor holds the average portfolio asset allocation, this becomes the starting point in determining how a specific individual’s portfolio might diverge from that average allocation.

VeriPlan supports several mechanisms for allocating assets permitting a comparison of projections based upon different asset allocations. Anticipating allocation adjustments that may be needed in the coming year, we will also discuss how near-term net income might be invested to reduce the need to reallocate some of your portfolio in the future. If asset withdrawals are required to cover anticipated retirement expenses or other living expenses, we will recommend how to do this most cost and tax efficiently. Our goals will be to establish a durable approach to asset allocation and to minimize costs and taxes.

See Part 2 — Pasadena California Financial Planning >>>

.

Financial Planning Pasadena CA

.


Larry Russell, Managing Director

MBA – Stanford University, MA – Brandeis University, and BS – M.I.T.

Lawrence Russell and Company Pasadena, California 91103

(626) 399-9579

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — DILIGENCE — SATISFACTION

A truly independent financial planner and fee only investment advisor

(Regarding how I am compensated, I work only on a hourly fee or fixed fee for service basis, and only under a contract agreed upon with you. You will not have to pay any asset fees. Furthermore, to avoid all conflicts-of-interest, I do not accept compensation or commissions of any type from the financial industry.)

Start a conversation today — Send a message using this contact form

Financial Planning Consultants in Pasadena California


Find the best personal financial planning consultant for those who need financial planning help in the Pasadena area including residents of Altadena, Arcadia, Baldwin Hills, Baldwin Park, Burbank, Eagle Rock, Glendale, La Canada Flintridge, La Crescenta, Monrovia, and Pasadena.

Your Family Financial Planning Process

<<< Go Back to Part 1 (Steps 1 to 5) — Family Financial Planning Pasadena

To find an in depth article for each step, just click on the “Pasadena Financial Planners Sitemap” link at the top of this page and look for the articles numbered from 6 to 10. Note that you can reach us by using the contact form below. Please enjoy reading this article. Thank you!

Step 6 – Select investment securities using valid criteria

Given the extremely large number and variety of available securities, investors need a rational basis to select among them. Without rational selection criteria and a good understanding of which factors are more or less likely to increase risk-adjusted returns, investors will make poor decisions based on false assumptions.

We will begin with the presumption that portfolio investment strategy would focus on broad-based, market oriented financial investments that can be acquired economically and held inexpensively in your portfolio for an extended period. We will provide a set of recommended investment vehicles and percentage allocations including a recommended minimum number of investment positions within each particular area. Consideration will be given to domestic versus international, value versus growth, small versus large capitalization, and other investment vehicles that may move the portfolio away from a broad market orientation. Of course, investment cost and tax implications will heavily influence these recommendations.

Consideration will be given to your existing investment portfolio to determine what parts should remain and what should change. We will discuss a transitional plan for those parts that we recommend to change, and our recommendations will consider the cost and tax implications of making such changes. When appropriate, recommendations will also address adjustments that counterbalance any financial concentration that you may have elsewhere in your portfolio.

Step 7 – Slash your investment costs and taxes

Even with optimal investment strategies, there is still substantial room to improve upon net investment performance through continued and vigilant focus on controlling investment costs and tax realization. The investment fees extracted by the financial securities industry are grossly excessive. Excessive costs imposed on “retail investors” have increased substantially during the past several decades on both a total cost and a percentage of returns basis.

At the same time industry deregulation, market innovation, and increased competition have provided many new and useful mechanisms for investors to manage their assets in a much more cost- and tax-efficient manner. It is not hard to cut your investment costs, but you have to be conscientious and vigilant. I will help you to become an extremely cost-conscious investor, and I will help you to remove all those hands that may currently be in your family’s financial wallet.

For your current asset holdings and for new investments we will model details of taxation and investment expenses in the projections. Recommendations will be provided which are designed to reduce investment costs, to reduce and defer tax recognition, and to shift tax realization toward lower tax rates.

Recommendations for new investment will focus on very low cost, passively managed investment vehicles. A very wide variety of very low cost cash, fixed income, and equity investments are available through low cost channels, and there is no reason to purchase more expensive vehicles that are not expected to provide any better return or risk reduction.

Step 8 – Budget your insurance expenses

The world is fraught with numerous potential risks – financial and otherwise. Insurance can be purchased for a wide variety of situations, but the issue is always value and affordability. Many people could spend all their investable capital on insurance and have nothing left to invest and build a financial cushion for the future. Therefore, we can discuss a budget for insurance expenses and your preferences for risks you are willing to bear and risks you wish to ensure.

While value, affordability, risk exposure, and risk tolerance should affect insurance purchase decisions, insurance is often sold and purchased emotionally. The issue is where to set a rational rather than emotional balance between expected risk and return.

Step 9 – Use time-efficient financial management practices

Time in life is the most precious and perishable asset that a person has. It should be spent enjoyably and efficiently. Scientific investment strategies that rely on relatively efficient financial markets allow people to minimize their time commitment to personal financial planning and personal investment management. Yet, on average, you can still expect to obtain optimal risk-adjusted portfolio returns that are near the market’s return

We recommend an annual review of your personal finance and investment plan on approximately the anniversary of your initial plan. At that time we will update your personal financial planning model and recommend any appropriate changes. In the interim, we can work together to implement recommendations that you accept and to perform other financial planning services that you want.

Step 10 – Self-manage with occasional professional consulting

Pick financial planning and registered investment advisors solely to obtain objective and high quality advice. Specific investment advice is potentially of high quality, if it is carefully customized to your particular needs and is given by an adviser who is very knowledgeable, highly competent, and completely independent. If you agree with the advice being given, then buy the recommended financial products through the most inexpensive channel possible.

We do comprehensive personal financial planning exclusively. We do not sell securities and do not hold assets in custody. We do not sell insurance, nor do we provide accounting services or legal advice. However, as part of our business development and networking efforts we make efforts to become acquainted with high quality professionals who can provide specialized assistance. In developing a plan for you, part of our focus will be on providing you with recommendations on how to acquire appropriate professional services both easily and economically.

See: Personal Financial Planning Pasadena CA >>>

.

Pasadena California Financial Planning

.

Larry Russell, Managing Director

MBA – Stanford University, MA – Brandeis University, and BS – M.I.T.

Lawrence Russell and Company Pasadena, California 91103

(626) 399-9579

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — DILIGENCE — SATISFACTION

A truly independent financial planner and fee only investment advisor

(Concerning my compensation, I perform services solely on a hourly fee or fixed fee for services basis, and only under a contract agreed upon with you. You do not have to pay any form of asset fee. Furthermore, to avoid all conflicts-of-interest, I do not accept compensation or commissions of any kind from the financial industry.)

Start a conversation today — Send a message using this contact form

Pasadena Financial Planning


Benefit from the best fee only investment advisor helping for those in the West Los Angeles area, including Altadena, Arcadia, Baldwin Park, Burbank, Eagle Rock, Glendale, Glendora, Hollywood, Irwindale, La Canada Flintridge, and Pasadena.

Financial Planning Reading List

The Pasadena Financial Planner has written extensively about personal financial planning and investment management on a variety of websites. When I work with clients to develop their customized lifetime financial and investment plans, they often ask what they should read to improve their financial literacy.

This article provides a list of recommended reading from among the many hundreds of articles that I have authored in the past several years. Note that I have personally written all the content that you will find on the six personal finance and investment websites referenced below. You can reach us by using the contact form below.

Enjoy!

The Skilled Investor website

Note that you can find all of my other financial websites, by going to The Skilled Investor website and clicking on the red colored links in the left hand column on any page of The Skilled Investor website.

On the front page of The Skilled Investor website you will find an index of pages with major categories and subcategories. Within the subcategories there are lists of articles and the front page tells you how many articles are in any subcategory. There are many articles in addition to those listed below, which you can find by clicking on the subcategory links below that have arrows in front of them.

Here are some suggested personal financial planning and investment management articles within the major categories and subcategories. Article titles are descriptive and should help you decide which articles you want to read first.

Personal Investment Management

  • Asset Allocation and Personal Investment Risk Tolerance Articles
  • Cost Control and Investment Performance Improvement Articles
  • Investment Asset Diversification Articles — Reducing Your Portfolio Risk
  • Investment Luck versus Investing Skill Articles
  • Investment Returns and Securities Market Risk Premiums Articles
  • Financial Planning and Investment Management Personal Efficiency Articles
  • Scientific Investment Best Practices Articles
  • How Stock and Bond Markets Value Investment Securities
  • Personal Financial Planning

    This is a much shortened list of available articles, because there are many other personal financial planning articles posted on The Pasadena Financial Planner website. See a selected list below.

  • Financial Decision Rules
  • Retirement Planning
  • About VeriPlan — Personal Finance Software for Your Lifetime
  • Financial Advisors, Investment Counselors, and the Financial Industry

    Are Your Best Interests the Same as the Financial Services Industry?

    Payment of Investment Advisors, Financial Planners, and Investment Counselors

    Selecting a Financial Planning Advisor or Investment Adviser

    Regulation of Financial Advisors and Investment Advisers

    Frauds and Scams by Financial and Investment Advisers

    Best No Load Funds website

    Click “Sitemap” in top banner for a list of articles. Suggested reading:

    To find articles that focus on each of these seven selection criteria, either click on the numbered headings within this article or go to the Sitemap.

    No Load Bond Funds website

    Click “Sitemap” in top banner for a list of articles. Suggested reading:

    The Skilled Investor Blog

    (associated with The Skilled Investor website)

    You could read these selected articles:

    Low Cost S&P 500 Index Funds website

    You could read these selected articles:

    The Pasadena Financial Planner website

    Click “Sitemap” in top banner for a list of articles.

    Suggested reading:

    The two articles above summarize “10 Financial Planning Steps in the Right Direction,” a recommended personal financial planning process. There are individual articles with more details about each of these 10 steps. You can find them by clicking on the bold section headers within the two articles above, or you can find them by clicking the “Sitemap” link on any page and looking for the articles that are numbered 1 through 10.

    In addition to these financial planning process articles, read:

    .

    See: Fee Based Pasadena Investment Advisor >>>

    .

    Pasadena Financial Planning

    .

    Larry Russell, Managing Director

    MBA – Stanford University, MA – Brandeis University, and BS – M.I.T.

    Lawrence Russell and Company Pasadena, California 91103

    (626) 399-9579

    A California Registered Investment Adviser — Certificate 133101

    KNOWLEDGE — OBJECTIVITY — HONESTY — DILIGENCE — SATISFACTION

    A truly independent financial planner and fee only investment advisor

    (Regarding compensation, I provide financial planning services only on a fixed fee or hourly fee for services basis, and solely under a contract that we agree upon. I do not charge any form of asset fee. In addition, to avoid all conflicts-of-interest, I do not accept commissions or compensation of any type from the financial industry.)

    Start a conversation today — Send a message using this contact form

    Financial Planning Pasadena CA


    Use the top fee only financial advisor — helping clients in Southern California, including Altadena, Tujunga, Walnut, West Covina, La Canada, West Hollywood, West Los Angeles, West Toluca Lake, and Pasadena.

    I DO NOT want YOUR money — the problem with fee only financial planners and percent of assets investment management fees

    I do NOT want YOUR money. Really, I don’t want YOUR money.

    To be clear, I do want to be paid by you a one-time fee for the investment and financial planning services that I provide to you. However, I do not want to be paid an annual percentage of YOUR assets like 99% of registered investment advisers who will take their fees out of YOUR assets year after year.

    Why? Because you are unlikely to get what you expect, when you pay percent of asset management fees.

    YOUR money is your money. You worked hard to build up the assets that you have. If I were to take a yearly percent of assets fee, then you would very reasonably expect that I should be able to justify my investment fee by delivering consistently higher returns. I should be able to improve consistently and reliably your net investment returns year after year, after all fees and taxes are taken into account. In addition, of course, I should be able to achieve these higher returns without increasing the aggregate risk of your investment portfolio, while reaching for higher returns.

    I am smart enough and educated enough to know that I cannot do this for you. I cannot guarantee future outcomes — nor can anybody else. While there is no shortage of investment advisers who hint and imply that they can and will do better for you, just ask for a written guarantee of that superior market performance net of all fees and taxes and all of these eager advisors will vanish. Poof. Just like a large portion of your assets are likely to go poof, if you agree to pay percent of asset fees over time.

    The problem with the “beat the market” crowd is that their members are overwhelming either uneducated, delusional, or liars — that is, too self-interested in their repeated fees to tell a truth they really do understand. If durable investment skill even exists, it is exceedingly rare. Both professional advisers and individual investors are greatly challenged to identify investment fund managers who might have truly sustainable skill. Then, of course, the question is whether any of these exceptionally rare managers can be hired at reasonable fees that would leave any excess for you that justify all your efforts to find these haystack needles.

    At least I am aware of and understand the research literature, and I act accordingly. The research literature tells you that seeking superior performance is hopeless. Doing so raises your costs and taxes, reducing your net returns. You throw your money away on a mirage. The longer it takes for you to wake up to this fact, the more you will give away to the high expense financial services industry, before you wise up.

    The Arithmetic of Investment Expenses

    In his 2013 Financial Analysts Journal paper (March/April 2013 pp. 34-41), “The Arithmetic of Investment Expenses,” William F. Sharpe, Stanford emeritus professor of finance and 1991 economic Nobel prize winner, clearly demonstrated that a lump sum invested at very low fees (.06%/year) was likely to result in 38% greater wealth after thirty years compared to average mutual fund expenses (1.12%/year). If instead, the investment pattern was to contribute equal amounts each year over thirty years, the low fee investment strategy resulted in 20% greater terminal wealth.

    To simulate various actively-managed fund tracking errors over thirty years, Professor Sharpe ran a million simulations using Monte Carlo analysis techniques drawing from  investment return data since the beginning of the 20th century. (The numbers below are derived from the text and from the various figures in Professor Sharpe’s paper.)

    With higher risk and higher tracking error (5%/year), Dr. Sharpe’s simulation indicated that higher cost actively managed funds could have a somewhat greater chance of beating low cost passive management. However, Professor Sharpe commented that “although betting on a relatively active manager with no ability to add value, on average, is a poor choice, the simulations show why a Darwinian process does not weed out such managers with great rapidity. … For those who choose funds with high expense ratios, hope may spring eternal.”

    This is only one example from the broad investment research literature, which clearly indicates that:

    A) winners cannot be identified before-hand, and

    B) low investment costs are the single most effective tool that an investor has in achieving higher wealth for each dollar they invest.

    Percent of assets investment management fees and the futile pursuit of superior bond and stock market performance

    Why is Professor Sharpe’s paper and the rest of the academic research literature on investment fees and active versus passive investment portfolio management relevant to whether an investment adviser charges a percent of assets fee? Professor Sharpe’s paper addresses mutual fund management fees, while percent of asset charges are a different layer of fees charged by financial advisers to their clientele.

    Here is why. When investment advisors charge a percent of assets fee — and these fees typically exceed 1% per year unless you have over a million dollars to invest and can get a reduced percentage — you want that to work hard to grow your investment portfolio. One percent of $1,000,000 is $10,000 a year — year after year after year. When clients pay thousands of dollars per year, very reasonably they want a positive return on these fees.

    Clients are very unlikely to be willing to pay so much money for a low cost, index portfolio that targets the market return. Instead, clients want their investment advisors to beat the market for them. The usual way to attempt this is for the financial advisor to invest the client’s money in actively managed funds with higher management expense ratios, higher investment risk, and as Professor Sharpe points out, a lower expected return compared to a passive portfolio that targets the market return.

    The net effect is that clients who pay percent of assets fee will pay both account based percent of assets fees added to high actively managed fund fees. This creates a double whammy of excessive fees that combined are much more likely than not to lead to lower future terminal wealth, especially as the time horizon increases.

    (And, if you think there is an excessive expense escape valve when your financial consultant does not use funds and instead tries his or her hand at being a stock and bond picker, think again. The research demonstrates that this is just more likely to lead to significantly reduced diversification and higher portfolio risk, along with all the extra trading costs and higher taxes on short-term capital gains rather than long-term capital gains.)

    Therefore, this is why I never have and never will charge my clients a percent of assets fee. Instead, I charge either an hourly rate for my advisory services or a fixed contract fee for preparing a turnkey lifetime investment plan or financial plan.

    I never play the superior investment performance game, because doing so is simply bad for you. I always recommend completely passive, index mutual fund and/or ETF investment portfolios with very low costs, very broad diversification, and asset class risk exposures that are appropriate to your risk tolerance.

    Any investor who invests otherwise will play the investment performance game and is expected to lose more the longer they play. Furthermore, they are fated to pay attention to the wrong things over time. While you chase the performance mirage, you take you eye off the financial factors over which you have much greater control and that you can affect.

    You cannot change the investment markets, and you should never try. You can only reduce your costs to the minimum. In doing so, you will adopt an entirely passive index investment strategy, which will inevitably be a lower risk strategy due to the very broad diversification provided by passive index investment strategies. You will also cut your investment tax payments, because portfolio turnover will be lower. Passive portfolios provide both greater tax deferral and reduced taxes, because higher portions of recognizable returns are taxed at favorable US federal long-term capital gains tax rates.

    Once you are cured of any performance chasing and superior performance delusions, then we can start working together on the things that you actually can change and plan for. These include, for example:

    … and the myriad of other planning tasks that I can help you with very cost effectively.

    keep looking »

    Financial Planner Pasadena