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.

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.

This article continues below this introduction:

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Larry Russell, Managing Director

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

Lawrence Russell and Company Pasadena, California 91103

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — DILIGENCE — SATISFACTION

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

Financial Planning Pasadena CA

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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

• You must stay invested in the securities markets to earn market risk premiums
• Commodity futures in your investment portfolio — Is there really any future for individual investors?

• Excessive investment costs are a huge problem for individual investors

• How much do hidden mutual fund trading expenses cost you?

• Is it worth paying higher bond mutual fund management fees?

• Pay less to get more (Part 1 of 2)

• The heavy burden of recurring investment fees (Part 1 of 2)

• Understanding one-time investment fees, such as sales loads

• What is the cost to individual investors of sub-optimal portfolio diversification?

• Why is diversification valuable to individual investors?

• Can a limited number of stocks provide complete portfolio diversification?

• How many mutual funds are needed for a well-diversified portfolio? – Commentary

• Chance creates the illusion that investors can beat the stock market

• The illusion of superior professional investment manager performance

• Distinguishing between true investment skill and luck

• What have average investment asset class risk premiums been over long periods?

• Asset class investment risk premiums — your reward for taking investment risk

• How stable have common stock market returns been over time?

• How are asset class risk premiums and the risk free rate of return related?

• How do return expectations of investors compare to historical stock returns and risk premiums?

• Calculating your investment wage and the opportunity cost of your time

• The value and opportunity cost of your investment time

• Passive Personal Investment Strategies are More Time Efficient with Better Returns and Risk Control

• 15 Value-Added Individual Investor Activities

• What else should you read about investing?

• A caution related to classic investment books

• How can individual investors trust, when so much investment information is rubbish?

• How investment securities are valued — snapshots in time

• Introduction to investment valuation and securities risk

• The confusing investment securities market motion picture

• What is efficient market pricing in the securities markets?

Personal Financial Planning

This is a must 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.

• The Problem — Straight answers about personal financial and investment planning are difficult to find

• The Solution – Only follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient

• Traditional versus Roth tax-advantaged plan contributions

• Factors that tend to favor Roth tax-advantaged plan contributions (Part 1 of 2)

• Summary Table of Traditional IRA and Roth IRA Tax Rules

• Executive Summary of VeriPlan

• VeriPlan’s 10 Financial Planning Tools and Financial Calculators

Financial Advisors, Investment Counselors, and the Financial Industry

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

• Financial science drives industry product development, but not necessarily toward the best interests of individuals

• The investment industry is not your investment partner

• How to lie with statistics: Investment performance charts (Part 1 of 2)

• Many individual investors are not fooled by an ethically challenged securities industry

• The securities industry calls marketing and selling – “advising”

Payment of Investment Advisors, Financial Planners, and Investment Counselors

• The economics of the financial advisory industry

• Does it matter how financial planners and investment advisors are paid?

• Can you really get free and objective investment advice, when you pay investment sales loads? (Part 1 of 2)

• How expensive is advisor compensation paid via sales loads?

Selecting a Financial Planning Advisor or Investment Adviser

• Preparing to interview a financial planner or investment advisor

• Questions to ask when hiring an investment advisor – Part 1 – Background and training

Regulation of Financial Advisors and Investment Advisers

• Regulation of financial planners and investment advisors — Introduction

Frauds and Scams by Financial and Investment Advisers

• Avoiding financial planning and investment advisor frauds and scams – Overview

• Avoiding financial advisor frauds and scams – The Never-do list — Part 1

Best No Load Funds website

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

• 7 Ways to Pick the Best Noload Mutual Funds and ETFs

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:

• No Load Bond Funds
• The Top 14 Low Cost Taxable United States Bond Mutual Funds (Low Minimum Deposit)

The Skilled Investor Blog

(associated with The Skilled Investor website)

You could read these selected articles:

• Where’s Waldo? – The illusion of superior professional mutual fund manager performance.
• Why only one Warren Buffett? The illusion of superior professional mutual fund manager performance.

Low Cost S&P 500 Index Funds website

You could read these selected articles:

• Top 10 S&P 500 Index Funds
• Buy an S&P 500 Index Fund with Low Costs

The Pasadena Financial Planner website

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

Suggested reading:

• Your Family Financial Planning
• Your Family Financial Planning Process

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:

• Living Expense Tracking Methods
• Asset Allocation, Investment Asset Tax Location, and Emergency Cash Management

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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 strongly recommend that people adopt some form of expenditure tracking to increase their understanding of their annual ordinary living expenditures. A variety of manual and/or automated methods can be used to track expenses.

In general, there are at least three primary methods of tracking ordinary living expenses on either an annual, quarterly, or monthly basis. These methods are more or less time consuming, and each provides differing levels of information about your consumption. Furthermore, these methods can have ancillary efficiency benefits to your ongoing family financial management process.

Any of these three methods could provide the information needed to validate your total annual ordinary living expense assumption for purposes of your long-term financial planning using the VeriPlan lifetime financial planning tool. The following discussions summarize these three methods, and I recommend that you choose the one that seems to suit you best.

This article continues below this introduction:

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Larry Russell, Managing Director

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

Lawrence Russell and Company Pasadena, California 91103

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — DILIGENCE — SATISFACTION

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

Financial Planners Pasadena California

Article continues:

A) Consolidated Account Cash Flow Expenditure Tracking

To track expenditures via cash flow analysis requires that you funnel all your expenditures through one or just a very few checking, credit, and debit accounts so that you have more consolidated records of your family’s financial transactions. The greater the number of accounts, then the more time consuming it is to remove inter-account transfers. Then, on either a monthly, quarterly, or annual basis, you simply measure the net cash flows and compare beginning and ending balances. The result is the net cash flow for the period.

For example, in its most simple form you would have one checking account and one or two credit/debit accounts, through which you paid all of your ordinary living expenses during a year. You could automatically deposit your net paychecks into this checking account, after your gross pay had been reduced for income tax and other tax withholdings, regular investments, etc. This consolidated account would be dedicated to paying only your ordinary living expenses, through 1) checks, 2) monthly payoffs credit card bills (in full, of course), and 3) cash for spending money.

Using this method, all you would need to do is take the beginning cash balance, add paycheck deposits, and subtract the ending balance to arrive at the ordinary living expenditures for the period. Of course, for whatever period you chose (monthly, quarterly) there would be a few bill payment timing issues. However, these timing issues, would tend to average out over the periods.

To make this ordinary expense cash flow measurement method work, you would need to pay other mortgage/debt payments and investments from a different account. Presumably, your ordinary expenses would be much less than your net earned income. As the cash balance in your ordinary expense checking account rose, you would periodically transfer cash to an interest bearing money market account periodically. Then, this interest bearing account would pay your mortgage, your debts, and enable you to make further make more investments – either automatically at regular intervals or on an ad hoc basis.

This cash flow method has the advantage of simplicity and requires only that you pay attention to which accounts you use for which types of payments. However, this method only provides an aggregate measure of ordinary living expenses and does not allow you to understand in detail where you are spending your money.

Note further that it is really not necessary to have a separate account to make mortgage, tax, and investment payments. If you use a single account, you would just need to adjust for any such “non ordinary living expense” payments, when you do your cash flow analysis. Nevertheless, using separate checking for ordinary living expense payments and a separate money market account for all other payments does have certain virtues.

While checking accounts do not pay interest, keeping a small cash buffer in a checking account can help to avoid periodic account fees and buffer your from overdraft charges. Periodically, as your cash builds up, you can transfer funds to an interest bearing money market account out of which you can pay mortgage bills and real estate taxes and make investments.

B) Receipt Collection and Addition

Alternatively, you could keep all receipts and total them on a monthly, quarterly, or annual basis. This method is more work than the account based cash flow analysis method discussed above. Receipt tracking requires that you be conscientious about collecting and totaling ALL of your receipts. This includes tracking the checks that you have written from your checkbook.

This receipts tracking method also would require you to track cash expenditures. You might simply make notes for cash expenditures (above some trivial minimum) and treat these as receipts. Otherwise, you could just use a very simplified cash flow measurement for your cash payments, such as adding up monthly ATM cash withdrawals.

While this manual receipt collection and totaling method requires more time and more conscientiousness about keeping receipts, it also can have more benefits. You can sort receipts into standard expense categories and keep a total of these categories.

Simple spreadsheets would allow you to track both expenditures within categories and total expenditures over time. Categorization of expenditures is helpful, when understanding fluctuations over time, and deciding where to reduce expenditures, if you sought to do so because your savings rate was below your expectations and plan.

C) Use of an Automated PC Expense Tracking Program

This third alternative can be more time consuming, but it can provide even more expense tracking and payment automation benefits. Overall, the use of a fully automated expense monitoring and bill payment system can be more efficient than a manual system.

There are a number of PC based automated personal expense tracking systems available. The leading one is Intuit, but there also are Microsoft Money, Mvelopes, and others.

For people who are very comfortable with computer based and Internet applications, these automated programs provide a wide variety of benefits. Regarding Intuit, for example, ordinary living expense tracking is almost a side benefit of using Intuit to manage your short-term cash flows and accounts. In addition to logging all your transactions, you can use its ability automatically to connect to your online financial accounts and to integrate your checking, savings, credit, and investment accounts for a unified view on your PC.

Learning an application like Intuit takes some time, and time is required for ongoing maintenance. Nevertheless, the automated integration of all your accounts, and the ability to make electronic bill payments and other financial transactions, can easily compensate for the learning and ongoing time commitment. People spend a large amount of time and postage manually paying bills by mail.

Furthermore, bill payments through the mails might not be delivered properly. In addition, sometimes mailed payments are not processed properly by the financial institution that receives them. These error situations are irritating and time consuming to correct. Electronic payments can be more efficient and more timely and can have a lower error rate.

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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.

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. Also, you can reach us by using the contact form below. Please enjoy reading this article. Thank you!

1 – Personal Financial Planning

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.

This article continues below this introduction:

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Larry Russell, Managing Director

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

Lawrence Russell and Company Pasadena, California 91103

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — DILIGENCE — SATISFACTION

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

Financial Planning Consultants in Pasadena California

Article continues:

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.

2 – Financial Planning Tools

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 lifecycle model, we will work together to gather information, adjust assumptions, and evaluate the effects of different financial decisions across your lifecycle. 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.

3 – Investment Risk Tolerance

Investors with different levels of risk tolerance are more satisfied 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.

4 – Investment Diversification Strategy

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.

5 – Investment 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 >>>

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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.

This is one of the “10 Steps in the Right Direction” that make up The Pasadena Financial Planner’s personal financial planning and personal investment management process. For a summary of these ten steps, see Your Family Financial Planning. To find an in depth article for each step, just click the Sitemap link at the top of this page. Also, you can reach us by using the contact form below, and you can subscribe to our Objective Family Financial Planning Blogs by clicking the orange RSS icon to the left. Please enjoy reading this article. Thank you!

Setting your personal investment asset allocation is a critical decision for every individual investor.

Asset allocation can be viewed as an extension of the Global Investment Diversification strategy principle to multiple types of assets, such as equities versus fixed income securities. Asset allocation is also how you blend your personal investment risk preference into your investment asset portfolio.

Appropriately setting your personal asset allocation in line with your personal risk tolerance is a critical decision for every investor. The percentages that are allocated to various asset classes tend to change slowly over time, so it is important to get it right at the outset.

Investing and asset allocation is all about risk-adjusted investment returns related to your overall investment asset portfolio. Because the risk and return characteristics of various asset classes are not completely correlated, changes in their market prices sometimes off-set each other. Therefore, you normally can assemble an investment portfolio with lower overall investment risk, when compared to the risk of each of the individual asset classes that make up your portfolio. In effect, the various asset classes provide additional diversification benefits that go beyond the investment risk reduction benefits that can be achieved through full diversification within each individual asset class.

What is an investment asset class?

At the outset, a word of caution about the proliferation of “asset classes” promoted to individual investors is useful. Whether you invest through broadly diversified index mutual funds or diversified exchange-traded funds (ETFs), the largest and most established investment asset classes are stocks/equities, bonds/fixed income, and cash/cash equivalents. Stocks, bonds, and cash are sometimes referred to as financial assets, and most often these financial assets are priced and traded on real-time securities markets.

Real estate property is an additional asset class, which creates some complications related to portfolio diversification. The great majority of individual investors with some financial assets also tend to be real estate property owners. For many, their real estate assets – usually their personal residence – can grow in value over their lives to become a very substantial and even majority part of their personal investment asset portfolios. Since this real estate equity is in a homes, which also provides shelter, then these real estate assets really function as a financial asset reserve of last resort after equity, bond, and cash financial assets are exhausted, usually during retirement.

Common stocks, which are one of the largest and most well established investment asset classes in the world, have been sliced and diced into a myriad of confusing segments.

The financial services industry is ingenious in its invention of new asset classes and its balkanization within even traditional investment asset classes. You may already be aware, for example, that the stocks or equities asset class already offers a large boatload of investor confusion. Even if you decide to invest only in mutual funds and/or ETFs for diversification and you intentionally avoid the daunting task of picking individual stocks, you still are confronted with extraordinary complexity. Stock investment fund choices include: small-cap, mid-cap, large capitalization, domestic, international, global, value, growth, core, sector, industry, hybrid, long-short, socially conscious, green, active, passive, index, Class A shares, Class B shares, Class C shares, and on and on and on.

Armies of securities industry sales and advisory personal compete for your attention and advocate that you assemble your personal portfolio according to differing and supposedly superior portfolio optimization techniques. Often, it is unclear whether these asset class segment inventions truly are beneficial to investors. Of course, the associated fees seem to guarantee that this segment proliferation will always be beneficial to the securities and financial services industry. The more complex things get, the more you seem to need someone to help you to fiddle with and to rebalance your portfolio. That, of course, costs more, too. Plus, you get to pay more repeatedly, because the fiddling never stops in this noble pursuit of more optimal risk-adjusted portfolio returns. Unfortunately, the additional costs most often outweigh the additional benefits.

Non-traditional investment asset class concerns

Beyond stocks, bonds, cash, and personal real estate holdings, there are numerous other perhaps real, but very often fanciful or false asset classes that are promoted to individual investors. A few of the alternative asset classes and associated investment products that are pitched to individual investors include: commodities generally, gold, foreign exchange, hedge funds in 57 varieties, infrastructure, managed futures, private equity, limited partnerships, variable annuities, etc. Once you stray beyond stocks, bonds, cash, and real estate, the proliferation of additional asset classes and investment vehicles seems virtually unlimited.

Unfortunately, many of these alternative asset classes and investment products are fraught with problems for less sophisticated (and even for more sophisticated) individual investors. Here is the rub. How can you tell whether an alternative asset class might genuinely be beneficial to add to your portfolio? Which of them should you hold?

Generally, the alternative investment asset class sales argument goes as follows:

“A) This special ‘new asset class’ has had very high returns. While this asset class also has had very high risk, if you had put this new investment asset class into your portfolio in the past, the risk would have been moderated. That is because values in this new asset class historically has zigged, when values of the other investment asset classes have zagged.

“B) Therefore, this new investment asset class might increase your future returns and could even reduce your portfolio’s overall risk. This is a great opportunity for you. You should put 5%, 10%, or x% of your total assets into this asset class. We have introduced some swell new investment products that address this asset class. It is too bad that you did not buy these investments years ago, before the run up in values. Unfortunately, we did not offer these investment products back then, because we have only introduced them recently in response to the loud clamor of investor demand. Of course, none of this loud investor demand has anything to do with us in the financial services industry loudly promoting these great future investment opportunities based on our back-fitted, data mining discoveries of selective “coulda-shoulda-woulda” superior historical investments.

“C) Pay no attention to the high fees and high costs of buying into this asset class with these new investment products. These extra costs are small in comparison to the potential payoff to you. Pay no attention to those naysayers behind the curtain, who may argue that historical performance is not predictive. Ignore their suggestions that this asset class was just cherry picked from the historical investment returns records, because of its past performance. Pay no attention to the ‘Nerds on Wall Street‘ behind the curtains.

“D) Do not listen to anyone who says that you could be paying a very high price to put a lot more risk into your portfolio with no assurance of a superior payoff in the future or reduced risks. What is that you say? You want a guarantee. Oh my, I am sorry, but there simply are not guarantees in investing. However, do not worry now. You can just trust me. We have done our research. See this 4-color brochure on the product? This is a nice silk tie I have isn’t it? Let me tell you about the swell tropical place I stayed, when I was on vacation. Oh, just sign here, while we chat.”

Heard this one before? Did you put in your money? How did it work out? How did you sleep?

An individual’s risk preference relative to that of the average investor influences the asset allocation that would tend to be most beneficial from a risk-adjusted portfolio performance point-of-view.

Your personal investment risk tolerance should determine your investment asset allocation. Investment always involves risk. If your personal capital is not at risk, you simply are not holding an investment. All investors — small or large – skilled or unskilled — irrational or rational — sophisticated or unsophisticated – must navigate the same uncertain securities market and economic waters to get to their financial goals. While investing involves significant complexity, much of which is unnecessary, an investor’s ability to tolerate risk or the occasional, inevitable, and unpredictable stormy waters will dictate whether they can stay in the markets in the bad times, as well as the good times.

By analogy, those who cannot tolerate rough waters, should sail in a bigger, safer, and slower boat (more cash and bonds and less stocks). Those who can better stomach the storm can sail in smaller, faster boats (more stocks and less cash and bonds) and perhaps go faster while exposing themselves to greater risk. On average historically, greater risk has yielded greater rewards, but investors need to be aware of their limitations and choose the appropriate investment boat, given their risk tolerance and fortitude. If the average investor sails in the average investment boat, then the more risk averse investor should choose a larger, slower boat, while the more risk tolerant investor should choose the smaller faster boat. Risk tolerant investors tend to be frustrated by the lower performance of slow boats, while risk averse investors in small fast boats may experience fears and losses (however temporary) that they simply cannot tolerate.

Virtually all investors are risk averse to some degree. Therefore, securities markets are expected to pay a positive, albeit uncertain, future return or risk premium. Otherwise, no investor with greater or lesser risk aversion would be willing to put their capital at risk versus storing their money in a more certain asset with lower risk. Those few who crave risk have casinos or day trading or Forex or commodities or some other  ”zero-sum-plus-costs” game, where they can give their money away to the “house” slowly or quickly — and hopefully they enjoy themselves during that foolish process.

Because the average risk-averse investor holds the average portfolio asset allocation, this becomes a reference point in determining how a specific individual’s investment portfolio asset allocation might diverge from that of the average investor’s asset allocation. The question becomes: “What is the average asset allocation of the average investor?” The aggregate values and relative proportions of the financial markets will define this average asset allocation.

Defining the average asset allocation of the average individual investor

For the rest of this discussion, we will focus on getting rough estimates of the primary financial asset classes — cash, bonds, and stocks — to develop a point of reference for the “average investor.” Of course, there are other asset classes that some individual investors hold, such as real estate and private business interests. These other classes need to be taken into account when developing a comprehensive family financial plan. Nevertheless, cash, bond, and stock financial asset interests tend to be the most easily changeable in their composition. Each of these financial asset classes can be readily converted into the other through modern real-time securities markets, and thus an asset allocation plan with infrequent rebalancing is prudent.

Measuring the average asset allocation of the average investor is therefore the goal. This should be pretty simple, correct? Just measure all financial assets held directly or indirectly for the benefit of individuals (in our case US residents) and figure out the proportions of cash, bonds, and stocks. These asset class proportions then become the average asset allocation reference point for the average investor. A more risk averse investor would then hold a portfolio the skews toward less investment risk, and the converse would be the case for a more risk tolerant investor.

However, this is only half of the puzzle, because the average asset allocation is not always stable over time. Economic cycles and securities market cycles exist, and their movements are correlated. The economy grows more quickly at some times and goes into a reversal during recessions and depressions. Securities market cycles tend to anticipate business cycles, but without any reliable assurance that the direction and strenght of current securities market anticipation is accurate. The prescience of securities markets can only be measured in hindsight, after changes in the economy have become clear and the future that was anticipated by securities markets becomes the past or history.

Since the turn of the century and the millennium, the US and the world has experienced extraordinary financial times. Two decades of expansion in the 1980s and 1990s peaked in a technology/communications/financial bubble that collapsed in 2001 and was followed by an anemic recovery and growth cycle from about 2003 to 2007. Without strong US job growth in this growth cycle and driven by rising US consumer debt obligations and a US housing value bubble, the US then lead the world into another financial or “credit crunch” crisis that was far worse than the dot com crash.

In the fall of 2008, the world stared into the abyss of global financial crisis, akin to Calypso’s maelstrom in “Pirates of the Caribbean: At World’s End.” It did not matter whether you were in a big slow investment boat or a small, speedy investment boat. Without the real world “special effects” of massive global government intervention in the securities markets, we would have found the end of this unfolding securities horror movie would have been to find most large boats and all small boats in Davy Jones locker at the bottom of the economic ocean.

In panic, those who could not stomach this maelstrom fled to the “dry land” of government guaranteed cash investments, and away from stocks and even bonds. The remainder of this article provides a few numbers that tell this disturbing financial tale. For purposes of setting an asset allocation strategy, one needs to decide whether to pay attention to the average asset allocation “normal” of the last several decades or to decide that what we just have collectively endured is the “new normal,” which it likely is not.

Average Asset Allocation Percentage Data for 2004

To understand the overall asset allocation percentages of the major financial asset classes, in mid-2004 I performed a detailed analysis of all US personal financial asset ownership held directly by individuals and indirectly by institutions for the benefit of individuals. Concerning the average portfolio of the average investor, I reviewed detailed data from the US Federal Reserve Bank which tracks total personal assets across all kinds of personal accounts including brokerage, tax deferred, pension, insurance, trust, and other accounts. The Fed’s June 2004 Z.1 report indicates that total U.S. personal financial assets were approximately $26.9 trillion dollars. In total in mid-2004, the percentage allocation across the major financial asset classes was 26.9% in cash and equivalents, 18.9% in fixed income, and 54.2% in equities.¹

For purposes of comparison, the Investment Company of America’s (ICI) end of 2004 estimate of total US domiciled mutual fund assets, which is a subset of the personal assets that the Fed tracks, totaled $7.5 trillion dollars.² The percentage allocation was 27.7% in cash and equivalents, 19.7% in fixed income, and 52.6% in equities. The mid-2004 Federal Reserve and the end of 2004 ICI numbers are remarkably similar. This gives confidence that these figures represent approximately the average asset allocation of the average personal portfolio. Analyzing the Federal Reserve data takes quite a bit of time, whereas the ICI data can be analyzed and understood much more quickly.

The average asset allocation at the mid-point of economic and securities market cycle can serve as a baseline for the asset allocation of the average risk-averse investor.

Therefore, if we summarize the Federal Reserve Z.1 assets data and the ICI mutual fund assets data for 2004, about 27% of assets were in cash and equivalents, 19% were in bonds and fixed income assets, and 54% were in stock and equity assets. With the benefit of several years of subsequent hindsight, the end of 2004 was roughly the middle of the last combined business and securities market cycle.

For an asset allocation comparison taken near the tail end of the market cycle prior to the credit crunch debacle of 2008/2009, I also looked updated ICI data for total U.S. domiciled mutual fund assets in November 2007. (U.S. domiciled mutual funds would include both domestic and international stock, bond, and cash investment assets.) The ICI reported that, at the end of November 2007, U.S. domiciled mutual fund assets totaled $12.1 trillion, which is about a 60% increase over total assets in mid-2004.³

Even with this huge, $4.6 trillion increase in total mutual fund value, the late 2007 percentage allocation was 25.7% in cash and equivalents, 17.0% in fixed income, and 57.7% in equities – again reasonably similar to mid-2004 with a moderate shift of value toward equities. The proportion of asset value in the equities asset class rose about 5 percentage points, as the business/economic cycle and securities market cycle advanced and matured.

Meanwhile the proportion of asset value in both cash and debt securities declined modestly. Cash has been redeployed somewhat, and bond asset values have declined as debt instruments have came under pressure in the credit crisis of the second half of 2007. Nevertheless, the change in percentages has not been dramatic. These figures demonstrate that, overall, about 55% of total asset value is held in equities, about 25% in cash, and somewhat shy of 20% in bonds.

These 2004 to 2007 proportions represent the average holdings of the “average” investor across all personal financial assets held in U.S. personal accounts, either directly or indirectly through institutional holdings on their behalf. Depending upon your relative tolerance for investment risk compared to the “average investor,” these average percentages are instructive concerning what an average individual investor’s asset allocation would be.

What happened to the average asset allocation during the recent credit crisis of 2008 and 2009?

While we can only hope the the credit crunch, financial markets crash, recession, and near depression of 2008 and 2009, is an aberation and not the new normal, it is instructive to look at a few data points to see what happened to the apparent asset allocation percentages at certain points during this crisis. Here I will use ICI mutual fund data.

Following a grinding decline in stock market values beginning in late 2007 and culminating in the free fall collapse of equity values near the end of 2008 and beginning of 2009, the stock markets bottomed out in March of 2009. The the equity markets began a recovery that was surprising to many if not most investors. (Note that this is being written in October of 2009 and thus I cannot predict (nor can anyone else) what will happen going forward.)

Measured at the end of the first quarter 2009, the ICI reported total US domiciled mutual fund assets of $9.2 trillion dollars or very close to 50% of the $18.2 trillion dollars in mutual fund assets held by investors across the globe. ⁴ For US mutual funds, 41% of total assets were held in cash equivalent money market mutual funds, 20% of assets were held in bond funds, and 39% of assets were held in stock or equity mutual funds.

In effect, when compared to the 2004 and 2007 figures above, there was roughly a 15 percentage point shift from stock funds to money market funds.(In aggregate the total value of US mutual fund asset almost $3 trillion lower than the total value near the end of 2007.) While only a small part of this shift in percentages can be was due to actual net redemption cash flows out of stock funds, the real explanation was that the collapse of stock market values accounted for the vast majority of the shift in overall percentages. Assets did not have to move. Equity values had just collapsed, as expectations about the future economy contemplated a severe depression.

And then the recovery of 2009 reversed trends in aggregate asset allocation percentages

Now, let’s take a look at the latest available figures at the time of this writing, which were for the end of  September, 2009. ⁵ The ICI reported total US domiciled mutual fund assets of $10.6 trillion dollars representing an increase in total mutual fund asset values for about $1.4 trillion in that six month period. For these US domiciled mutual funds, 34% of total assets were held in cash equivalent money market mutual funds, 21% of assets were held in bond funds, and 45% of assets were held in stock or equity mutual funds. In effect, when compared to the end of March 2009 figures above, there was roughly a 6 percentage point total value shift in favor of stock funds and a 1 percentage point shift in favor of bond funds — all away from money market funds. Again only a  small part of this shift in percentages can be accounted for from actual net cash in-flows into stock funds.

The vast majority of the last six months of equity market appreciation was due simply to a recovery of equity market values and not due to cash in-flows. Those who were in the market benefited with paper gains, just as the vast majority of them had paper losses as the markets collapsed in 2008 and early 2009. The real question is whether current aggregate asset allocation percentages are the new normal, or just a transition from a severe securities market crisis back toward the historical norm. This is a critical asset allocation decision for investors.

If you were an average investor and held the average asset allocation of 2004 to 2007 and had an investment policy to retain that asset allocation through periodic re-balancing, then you would have been a net buyer of equity assets as securities market values collapsed in 2008 and early 2009. While perhaps emotionally challenging to anyone, this “buy equities into a crisis” (and “sell them into a growth cycle”) strategy would have positioned you for the recovery that occurred in 2009. Most who flew to cash did so after most of the collapse in equity values had already occurred (buy high and sell low), and they were sitting in cash on the sidelines in surprise as equity market values recovered. The investment research literature has repeatedly shown that market timing is an inferior strategy. In the next few years, we will undoubtedly seem more studies that repeat this finding. Even if another maelstrom reoccurs, this will be yet another opportunity for investors to achieve dramatically inferior portfolio performance, when they do not have a well-defined long-term asset allocation and re-balancing strategy in place and when they do not have the will to implement it consistently over time.

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Larry Russell, Managing Director

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

Lawrence Russell and Company Pasadena, California 91103

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — DILIGENCE — SATISFACTION

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Professional advice about your personal investment portfolio asset allocation

If you are confused by asset allocation and all these investment product choices, hire a genuinely competent, knowledgeable, and objective financial advisor to help you. However, if your financial advisor or investment counselor is the one promoting alternative investment classes, perhaps you might want to run the other way.

In particular, you might want to run away, if your stock broker, investment counselor or financial adviser will get paid to sell these alternative asset class investments to you. Furthermore, if you answer just a short investment risk questionnaire and your investment advisor quickly classifies you as a conservative, average, or aggressive investor, be wary. If your advisor quickly starts selling, this might be a very good time to head for the door. An advisor with wrong strategy on commission can be a very large part of the problem rather than the solution.

For more information about personal investment portfolio asset allocation, see these articles on “Asset Allocation and Personal Investment Risk Tolerance.” These articles are published on our sister website, The Skilled Investor. Again, you can subscribe to our Objective Family Financial Planning Blogs by clicking the orange RSS icon to the upper left.

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Footnotes:

1) Federal Reserve Bank, Federal Reserve Z.1 Report. June 10, 2004. http://www.federalreserve.gov
2) Investment Company Institute. “2004 Mutual Fund Fact Book.” Note that while the balanced or mixed mutual fund category is relatively small and usually constitutes about 5% of total mutual fund assets, this category consists mainly of bonds and stocks. For purposes of analysis, I assumed that the proportion of assets in the balanced or mixed category was 50% bonds and 50% stocks and I allocated these dollar amounts to the primary bond and stock asset categories to eliminated the mixed category.
3) Investment Company Institute. “Trends in Mutual Fund Investing, November 2007″ (The same procedure for balanced or mixed mutual fund assets as decribed in the note above was applied.)
4) Investment Company Institute. “Worldwide Mutual Fund Assets and Flows, First Quarter 2009″ Supplementary Table S4 (The same procedure for balanced or mixed mutual fund assets as decribed in the note above was applied.)
5) Investment Company Institute. “Trends in Mutual Fund Investing, August 2009″ (The same procedure for balanced or mixed mutual fund assets as decribed in the note above was applied.)

This is one of the “10 Steps in the Right Direction” that make up The Pasadena Financial Planner’s personal financial planning and personal investment management process. For a summary of these ten steps, see “Your Family Financial Planning.” To find an in depth article for each step, just click the Pasadena Financial Planners Sitemap link at the top of this page. Also, you can reach us by using the contact form below. Please enjoy reading this article. Thank you!

Investment diversification is a genuine financial “free lunch.” Diversified investment funds are key contributors to optimal 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. When you hear that you should diversify your investments, this means that you should diversify your investments completely and globally – now and always. The investment research literature repeatedly demonstrates that a fully diversified, low cost investment strategy is superior. Get diversified. Stay diversified. Be globally and fully diversified all of your life.

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Larry Russell, Managing Director

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

Lawrence Russell and Company Pasadena, California 91103

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Diversification is really not an option, if your goal is optimized, risk-adjusted personal investing. Diversification is not an optional part of family investment strategy, if that family wants to sleep well at night. When you are less than fully diversified, every day that you wait exposes you to investment risks that the securities markets tend NOT to compensate through better returns. When you are less than fully diversified, your investment portfolio risks are higher than they need to be without a reasonable expectation of getting any likely additional returns.

When you chose an active management strategy versus a passive one, try to time the markets versus staying put, buy individual securities versus funds, favor certain economic sectors versus full domestic and international diversification, etc., then you are much more likely to lose than to win. This is simply because the road you are taking is unnecessarily rough and unnecessarily winding, and you have less certainty that you will reach your goals. You might overshoot in performance if you are lucky, but you are much more likely to under-perform, because of the various higher expenses and costs that continually drag down active strategies. The longer your time horizon the greater the chances that you will fall behind a passive, lowest cost, market investment strategy.

A passive strategy targets a market return and can still be a bumpy ride — especially if you are not fully diversified globally and you have not adopted an asset allocation that is appropriate to your tolerance for investment risk. Nevertheless, the attendant risks are lower and potential variations are narrower than active strategies. Furthermore, passive strategies that drive down investment costs and expenses to the bare minimum are not continually burdened by repeatedly having to pay the financial services industry a much larger and undeserved share of your returns. It is hard enough to finish a marathon without carrying water for the financial securities industry at the same time.

Full global investment diversification using the broadest, cheapest, most passive index mutual funds and exchange traded funds (ETFs) is the most optimal strategy for the individual investor.

Few in the industry will tell you this, because a lowest cost, global, and passive diversification strategy is the least profitable to the financial services industry. The securities industry looks upon you as a naive “retail investor.” The industry trains its representatives to sell to you the most profitable products that it can at “retail” prices.

Through visible and hidden fees and other costs, these “retail” prices are heavily marked up to compensate the industry and its very highly paid sales force. Who do you think is paying for all those tall buildings, brass fittings, mahogany tables, woolen suits, and expensive silk ties? Who pays the industry’s huge salaries and bonuses? Does the money just come out of thin air, or does it come out of your investment assets and your investment returns?

Few will tell you this fundamental truth about the superiority of cheap, passive, fully diversified broad market investing. Everyone in the industry gets paid somehow, and there is far less profit in promoting a low cost, fully diversified investment strategy. However, there is real money in it for you. In the long run, you will tend to save more money, to save more time, and to save yourself from emotional consternation, when you use a very low cost, fully diversified passive investment strategy.

Complete investment diversification has become an axiom of personal investing, because the specific risks of businesses and other investment entities can be reduced or eliminated with a fully diversified portfolio without reducing your expected returns.

A fully diversified portfolio is an absolute investment necessity. Increased diversification reduces portfolio risk without a corresponding reduction in expected portfolio returns. Diversification is genuinely an investment “free lunch,” and it is a key contributor to improved investment risk management. A very high degree of diversification can be achieved through investing in a variety of low cost passively managed index mutual funds or exchange-traded funds. Such investments are also among the lowest cost investment vehicles available to individual investors in the financial markets. Given that this alternative is easily and cheaply available, the relevant question is never whether a portfolio should be fully diversified.

Through investments in broad-based index mutual funds and exchange-traded funds, diversification is relatively easy and inexpensive to achieve. Attempting to become broadly diversified through the self-assembly of a portfolio of a large number of individual securities is far more difficult and much more costly.

Portfolio self-assembly is much more likely to result in higher risk with returns that lag the market. Buying individual stocks and bonds instead of diversified funds provides you with no advantage whatsoever. The industry likes it, because individual securities trading generates fees and keeps the charade of beating the market going. However, when you buy individual stocks and bonds, you are less than fully diversified, and you are exposed to more risk. Plus, you also get to waste your money and time for nothing. Pay more and get less. What kind of value added is that? You are better off ignoring that kind of investment counseling and financial advice.

Also, see these articles for more about the value of diversification: “The value of diversification to individual investors” and “What is the cost to individual investors of sub-optimal portfolio diversification?” These articles are published on The Skilled Investor, and they report on important investment research studies on asset diversification. Note that The Skilled Investor is one of our sister publications, and it is the longest running of our family of websites.

A significant portion of a investment portfolio may sometimes become concentrated in a single investment security, which dramatically increases the overall risk of a personal investment portfolio.

While generally undesirable, there sometimes are unavoidable reasons for investment concentration. Unavoidable reasons for lack of diversification can include owning a private business or being a key member of a company management team who is required to own company stock by an employment agreement with the company. In such circumstances, you should seek expert guidance on possible ways to mitigate the risk associated with your concentrated investment position.

Nevertheless, for 99.9+% of investors, there is absolutely no good reason to maintain a high level of concentration in an individual security. Immediate steps should be taken to reduce the exposure. How many failed public companies like Enron and WorldCom do investors need to see crash and burn, before they realize that excessive concentration does not pay and can lead to very significant personal financial peril?

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This is one of the “10 Steps in the Right Direction” that make up The Pasadena Financial Planner’s personal financial planning and personal investment management process. For a summary of these ten steps, see “Your Family Financial Planning“. To find an in depth article for each step, just click the Sitemap link at the top of this page. Also, you can reach us by using the contact form below. Please enjoy reading this article. Thank you!

Individual investors with different levels of investment risk tolerance for financial risks tend to be more satisfied with risk management strategies, which are better aligned with their financial risk and return profile.

Individual investors differ in their personal preferences related to risk management in their personal investment portfolios. This means that more risk-averse investors are personally more satisfied with a less risky investment portfolio – despite the fact that the expected returns of a lower risk portfolio may be substantially less. In contrast, investors who are less risk-averse tend to be more satisfied with portfolios characterized by both higher risk exposure and higher expected stock market returns.

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Larry Russell, Managing Director

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

Lawrence Russell and Company Pasadena, California 91103

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — DILIGENCE — SATISFACTION

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Everyone would love both low investment risk and high investment returns in the same portfolio, but such portfolios are just pipe dreams. Investing is all about intelligent and sensible exposure to investment risks. If you are not exposed to the risk of losing some or all of your capital, you are not investing. Nevertheless, there are market investment risks that historically have paid an investment risk premium, and there are many other ways to take risks without a reasonable expectation of being compensated for those risks.

When defining a personal investment strategy and before making related decisions, it is important for individuals to assess their personal risk tolerances relative to other investors. The challenge is to gauge risk tolerance relative to others and then to adopt an investment strategy that reflects that relative risk tolerance.

Investing involves risk, and there is no way around it. Investing means that the investor is willing to incur risk in exchange for the possibility of a higher payoff. An investor’s relative risk tolerance is the primary decision in his asset allocation strategy.

You are not investing, unless there is a chance that you will lose some or all of your capital investment. Rational investors expect increased returns for taking on investment risks.

True investors are all assumed to be risk-averse versus risk-seeking. Market prices of securities reflect the market’s current risk consensus. Investors have rational expectations for positive risk-adjusted payoffs. Investing is not like traditional gambling, where the expected average payoff is negative.

On average, stock and bond investments have paid investment risk premiums historically. These premiums have fluctuated and have been thoroughly unpredictable. Investors who have consistently stayed in the market have earned higher returns over time. While the desire to avoid investment risk is understandable, investment studies have demonstrated that efforts to time the market by jumping in and out have not been successful.

Everyone would like higher returns, but only some are able and willing to live with the greater risks that are associated with a potential for higher returns. However, there are no guarantees in investing.

Investors with different levels of risk tolerance are more satisfied by the expectations associated 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.

All apparent investment “guarantees” have a price and have risks. Because investing is inherently risky, individuals should understand their probable response to risk factors that actually do materialize. Risk tolerance is an issue of personal psychology and will determine whether an investor will adhere to and sustain an investment strategy during more difficult economic and investing times. When markets are performing poorly and fears are high, an inappropriate alignment between an individual investor’s portfolio risk or volatility and his or her risk tolerance can be very costly.

In such circumstances, some less knowledgeable and unprepared investors may take actions, which may be appropriate to their personal psychology at the time. However, these mistaken actions can be highly inappropriate for the current financial market situation and highly detrimental to their long-term financial goals and welfare.

For example, some investors may panic and sell when they did not have to, only to see the market recover later, while they remain on the sidelines with a dramatically diminished financial asset portfolio. Portfolios with different risk and return characteristics are simply better for certain investors depending upon their tolerance for risky investments.

While there are a variety of approaches to the measuring personal investment risk and return preferences, brief and overly simple written surveys often are not sufficient.

Individuals need to assess their emotional and behavioral tolerance for risk relative to the average person holding investment assets. This self-assessment process is not easy. Individuals need to reflect upon personal real-life financial and other situations from their past lives, which involved significant risks and rewards.

Individuals often are reasonably good judges of their likely behavior in the face of stock market risks and other financial market risks that might actually materialize. However, these same individuals often are not good at assessing the likelihood of risks occurring. A truly competent and objective financial adviser and investment counselor can aid in this process.

The asset allocation of the average investor’s portfolio serves as a baseline for average investment risk tolerance. The challenge is to determine your risk tolerance relative to such an average investor, and then to adjust your asset allocation accordingly.

An investor would not wish to be talked into an overly aggressive and uncomfortable investment strategy that would be difficult to sustain through difficult times. Conversely, an investor would not wish to adopt an overly conservative strategy. Conservatism may feel more comfortable, but it tends to require much higher rates of personal savings to build up needed investment assets across a lifetime.

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The best financial investment advisor for people who live in the West Los Angeles area, including Glendale, La Crescenta, La Tuna Canyon, La Verne, Los Feliz, Monrovia, Montrose, North Hollywood, and Pasadena.

This is one of the “10 Steps in the Right Direction” that make up the Pasadena Financial Planner’s personal financial planning and personal investment management process. For a summary of these ten steps, see “Your Family Financial Planning.” To find an in depth article for each step, just click the Sitemap link at the top of this page. Also, you can reach us by using the contact form below. Please enjoy reading this article. Thank you!

Your personal savings rate is the single most important personal financial planning lever that you control directly through your lifetime efforts to earn income and to manage personal expenditures and your family budget.

Economists call the potential of each person to earn money, pay expenses, and still set aside financial savings their “human capital.” For most people, their personal human capital is all they have financially, until they convert some of their human capital into more durable investment assets.

Over their lives, individuals must rely increasingly upon assets to replace earned income. Without the good fortune of receiving substantial inheritance and gifts or winning the lottery, you can invest – only if you save. When saving to fund an investment program, you must live within both your current and future economic means.

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Larry Russell, Managing Director

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

Lawrence Russell and Company Pasadena, California 91103

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — DILIGENCE — SATISFACTION

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Saving money adequately across your lifetime is the most difficult challenge that you and your family face.

Prior to retirement, you must produce earned income to cover current expenses. Furthermore, you must produce excess income and control your expenditures to allow for adequate personal savings rates. Your personal savings rate will largely determine whether you will build up enough assets for the unknown and uncertain future that lies decades in front of you. In retirement, your cash flow management challenge shifts from saving for retirement to retirement expenditure management. Your retirement investment assets and investment income must be adequate for your retirement expenses, yet you cannot know how long your retirement savings will last.

In relative terms, your lifetime investment management strategy is a piece of cake compared to the challenge of earning, controlling expenses, and savings. Personal savings and cash flow planning are relatively difficult, while optimal lifetime investing is relatively straightforward.

A positive difference between current earned income and household expenditures – or plain old financial savings – usually results from awareness and intentional control of personal consumption.

Expense control allows for personal savings, personal investing, and eventually deferred consumption of investment returns and the investment principal, if necessary. Those who are better at managing their savings plan tend to be much more conscious of their expenditures. They tend to be more aware of the level of their current personal expenses relative to their current earned income. In short, they are better at personal financial planning and family cash flow management.

Personal savings rates increase with conscious planning and better expenditure decision-making. Better expenditure control results from a conscious decision made at the time of each purchase. Across your lifetime, the quality of your personal financial decision making at the point of purchase will determine much of your overall financial success.

Each purchase potentially involves a “need versus desire” decision. Some people do this better than others. Some plan ahead and understand their limitations. Many simply do not.

The Pasadena Financial Planner believes that lifetime financial success is dominated by both the quality of personal consumption decision making and knowledge of one’s current financial limitations. In the long term, many frugal people of modest means will end up more secure financially, when compared to higher earners with less conscious understanding and control of their expenditures.

Most people simply do not have a high enough personal savings rate to meet their retirement savings and other future financial needs.

Your cumulative lifetime labor earnings are variable and uncertain. Your human capital is perishable. Personal income volatility has increased significantly at all income levels in recent decades and people must exercise increased discipline to restrain spending in a fluctuating income environment. The passage of time steadily diminishes your total personal earning potential. Furthermore, illness and injury can randomly slash the value of your potential human capital, while disrupting your life, while permanently altering your best-laid financial finance and savings plans.

The Bureau of Economic Analysis of the U.S. Department of Commerce has tracked the national personal savings rate since 1952, as part of its “National Income and Product Accounts” and “Flow of Funds” reporting. From the 1950s through the 1980s the national national savings rates fluctuated around the 9% to 10% range. In the early 1980s, these rates began to decline. In 2006 and 2007, they have turned slightly negative. Only after the dreadful global credit crunch of 2007 to 2009 had devastated credit availability and forced both lenders and borrowers to change dramatically their easy borrowing and lending practices did this trend reverse. In 2009, the US savings rate began heading toward the high single digit percentages and people spent less, saved more, and paid down their debts more quickly. Whether the national savings rate will approach or exceed 10% and stay there is a significant question. This savings rate will have a great impact on the long-term financial security of many millions of US families.

A negative national personal savings rate means that for every dollar someone saves, another American goes more than a dollar into additional debt. This American savings trend (or lack thereof) is very disturbing, since a sustained long term savings rate of 10% to 20% is usually required to save adequately for secure and comfortable retirement.

Therefore, the first thing you must get right is your financial savings program. To ensure that your personal savings rate is high enough to build up an adequate asset base, you must understand, track, and project your cash flows. You cannot know the adequacy of your savings rate and your progress toward your investment goals without measuring your current progress and projecting your future cash flows.

Any comprehensive cash flow projection must also include planned future cash requirements for living expenses and special requirements, such as a down payment on a house, college expenses, retirement, charitable giving, and estate bequests. Projected personal financial requirements provide the baseline expenditure plan over which you can overlay various income and investment return scenarios to test the adequacy of your current savings and investment plans.

When you work with The Pasadena Financial Planner, we will use VeriPlan to analyze and project your lifetime financial affairs in comprehensive detail.

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 of your significant assets, including cash, bonds, equities, property, real estate, private equities, and business interests.

This comprehensive lifetime financial planning and cash flow modeling process is very important. We measure your current financial circumstances and model your goals and intentions for the future within this framework. To develop your customized lifecycle model, we will work together to gather information, adjust assumptions, and evaluate the effects of different financial decisions across your lifecycle. For more information about VeriPlan, see: Lifetime Financial Planning Software.

VeriPlan can vary future expected investment returns by asset class, and it automatically analyzes the details of your taxes, investment expenses, and retirement investment plans. Any and all assumptions can be changed for instant “what-if” testing. The cash flow 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. Because excessive and unnecessary investment costs undermine the lifetime investment returns of most people, VeriPlan automatically projects the returns you will waste with such excessive investment fees, if you do not choose more cost-efficient investments.

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During my 20+ year Silicon Valley business management career, I had saved and invested according to the financial principles that I had learned at the Stanford Business School in the early 1980s. (See: Pasadena Financial Planner) Retiring in 2001, I began a systematic reading of the academic literature about personal financial planning and personal family investing.

As I searched the web, university libraries, and on-line scholarly paper repositories, I was impressed by how much very useful personal financial planning information was scattered around the academic world. It seemed to me that many individuals and families were starved for just this kind of objective financial and investment information. At the same time, people were drowning in a sea of self-interested securities and financial services industry sales pitches that pushed overly expensive and unnecessarily risky investment products, with expected returns that were much more likely to be inferior due to these high investment costs.

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Larry Russell, Managing Director

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

Lawrence Russell and Company Pasadena, California 91103

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — DILIGENCE — SATISFACTION

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Information from the financial media and financial services industry is superficial and biased.

The financial media and the securities industry generate a deluge of information, but leave individuals with very little systematic or durable understanding of which are the best financial planner practices, and which practices are likely to be inferior. Faced with all this finance and investment “noise,” individuals are hard pressed to understand what is true and what financial and investment claims have or have not been verified. Without valid guideposts to screen out all the noise and self-interested hype, individuals cannot reasonably be expected to plan a proper course for their lifetime financial affairs.

Scientific financial planning information is very useful to individuals for personal financial planning and investing.

As I returned to my academic and research roots, I began to read finance and investment journals, to visit finance professors’ websites, and to search the Internet for publications and working papers. After my first year of almost full-time reading, clarity began to emerge. By the middle of 2003, I was convinced that I understood more efficient and scientifically verifiable pathways for individuals to optimize their financial planning and investment strategies.

Since then, I have collected and organized over 25,000 electronic documents related to personal finance and investing. I have read thousands of research paper abstracts and over 1,000 seminal financial and investment papers in their excruciating economic and statistical details.

Nevertheless, academic research papers are not written for individuals, but rather for other academics and for highly trained financial industry research professionals. Furthermore, useful information is dispersed in a sea of less useful research information not focused on personal financial planning. Moreover, these research papers contain the obscure vocabulary of economic and statistical research — not breezy reading at all! To make some of this information more accessible, I have written hundreds of articles and published them for free on various financial websites.

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See: Financial Planner Pasadena CA >>>

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Find the best independent investment advisor for money conscious people in Pasadena, Altadena, Arcadia, Baldwin Park, Burbank, Eagle Rock, Glendale, La Canada Flintridge, La Crescenta, and other surrounding cities.

I am committed to the financial education of my clients. I strongly believe that financial education will help you to make much better personal financial planning decisions across your lifetime. Together, we can significantly improve the quality of your practices in family financial planning and your personal investment management.

We will work together cooperatively to analyze your financial affairs. We will develop a detailed lifecycle projection model of your family’s finances that will allow us to automate the testing of how different personal financial decisions might impact your family’s financial future.

I will help you to understand and adopt more durable, time-efficient, and cost-effective lifetime financial and investment strategies. I will advise you on improved methods for the long-term self-management of your family’s financial affairs. Your personal financial and investment plan will be designed for cost-efficiency, tax-efficiency, and time-efficiency. Once established, your financial plan should require minimal tuning over time.

This article continues below this introduction:

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Larry Russell, Managing Director

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

Lawrence Russell and Company Pasadena, California 91103

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — DILIGENCE — SATISFACTION

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

Financial Planner in Pasadena California

Article continues:

As your personal financial advisor and independent investment advisor, I will also act as your financial consumer advocate.

I will help you learn how to be a highly cost conscious consumer of financial and investment products that are consistent with your personal financial goals and plan.

My financial and retirement planning services will be valuable and cost-effective to you. My financial consultant fees will be reasonable, clearly understood, and determined in advance. I can provide you with comprehensive, reasonably priced financial, investment, and retirement planning services on an hourly, fixed fee, or retainer basis.

I will never charge any fees in relationship to your assets. Simply put, your financial assets are yours and not mine. I believe that financial advisor fees should not be proportional to your assets.

Your family’s interests will always come first. I will work exclusively for you and your family. I will never accept any form of compensation from any third party.

When delivering my financial planning and investment advisory services, I will never tolerate any conflict of interest. No financial industry incentives will ever interfere with my development of an optimal long-term financial plan for you. My recommendations will focus exclusively on your family’s financial interests.

Get help from a fee only financial planner and independent investment advisor who will:

• Take the time necessary to understand your family’s personal financial and retirement planning situation in comprehensive detail
• Provide thorough, personalized, and specific financial action plans
• Put you at the center of decisions using a sophisticated and fully automated personal financial planning tool that projects across your lifetime the potential impacts of financial decisions you might wish to make.

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See: Pasadena Financial Planners >>>

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Serving clients throughout the greater Pasadena, California area including these cities: Glendale, La Canada, La Crescenta, La Tuna Canyon, La Verne, Los Feliz, Monrovia, Montrose, North Hollywood, Pasadena, San Marino, and South Pasadena.

• Take the time necessary to understand your family’s personal financial and retirement planning situation in comprehensive detail
• Provide thorough, personalized, and specific financial action plans
• Put you at the center of decisions using a sophisticated and fully automated personal financial planning tool that projects across your lifetime the potential impacts of financial decisions you might wish to make.

.

This article continues below this introduction:

.

Larry Russell, Managing Director

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

Lawrence Russell and Company Pasadena, California 91103

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — DILIGENCE — SATISFACTION

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

Financial Planner in Pasadena CA

Article continues:

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My knowledge of personal financial planning and investing has been developed through:

• education at Stanford University (MBA), Brandeis University (MA), and M.I.T. (BS)
• twenty-five years of corporate and start-up management experience in the business development, financial planning, corporate development, and investment functions
• studying the scientific finance research literature in depth to find evidence about which investment and financial planning strategies work and which do not
• design and engineering of sophisticated lifecycle personal financial planning software to support the development of highly personalized lifetime family financial plans

Do you want reasonably priced, comprehensive financial planning services from a responsive fee only investment advisor and personal financial planner?

My financial and retirement planning services will be valuable and cost-effective to you. My financial consultant fees will be reasonable, clearly understood, and determined in advance. I can provide you with comprehensive, reasonably priced financial, investment, and retirement planning services on an hourly, fixed fee, or retainer basis.

When delivering my financial planning and investment advisory services, I will never tolerate any conflict of interest. No financial industry incentives will ever interfere with my development of an optimal long-term financial plan for you. My recommendations will focus exclusively on your family’s financial interests.

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See: Pasadena California Financial Planner >>>

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Serving clients throughout the greater Pasadena, California area including these cities: Altadena, Glendale, La Canada Flintridge, Montrose, Pasadena, Rosemead, San Dimas, San Gabriel, San Marino, Silver Lake, South El Monte, and South Pasadena.

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