10 Personal Financial Planning Steps in the Right Direction
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 on the Sitemap link at the top of this page. You can reach us by using the contact form below. Please enjoy reading this article. Thank you!
Step 1 — Take personal responsibility
You need to develop your own personal financial management skills, because you must live with the results of your financial planning and investment management decisions.
Because you must live with the results, you need to take full responsibility for your own financial planning 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 is very risky to your welfare. The only sensible solution is to increase your personal knowledge and skill in financial planning and investment management.
People face formidable challenges to lifetime financial success and their ability to retire with financial security. Throughout your life, you must decide for yourself whether any particular personal financial planning or investment management concept is fact or fiction. One thing can be guaranteed — there will be no shortage of ideas proposed to you by others about what you should do with your money.
The best individual investment and financial planning rules persist and do not vary due to market cycles or financial crisis. The financial crisis demonstrated clearly that there really are no “smart money” managers — at least none that you can hire to work in your interests after all of their costs are considered. Furthermore, when the financial tide went out, so much fraud and malfeasance was uncovered that only the most gullible of people still believe that wide swaths of the financial services industry actual operate in their best interests.
Individuals or “retail clients” are a huge industry profit center. The profits are immense, the fees are ever-present, and the bite out of your wallet is huge over the course of your lifetime. You need to get educated, and you need to be skeptical.
While the industry has very polished song and dance routines in a vast rainbow of flavors, most of what you are told to do is not what is best for you. The vast majority of the supposed “financial innovation” that you encounter is designed largely to lighten your wallet. These numerous industry pick-pocket processes are subtle, but steady, and most investors never understand the lifetime opportunity cost of paying “just a few percent” for services without commensurate value.
Even when you delegate decisions to an investment counselor or financial advisor, you and your family still must live with the consequences. You must learn about financial planning and investing.
Only a minority of the investment, mutual fund, ETF, insurance, annuity, education, retirement, and other specialized financial products that you encounter have any long-term validity demonstrated in the objective financial research literature. Unfortunately, your best interests will come after the best interests of the financial services industry. It is a simple as that.
You must make intelligent and informed decisions about whether the financial planning strategies and tactics recommended to you in the financial media and by financial advisers are valid for you and your family. The vast majority of financial ideas proposed to you during your lifetime will be suboptimal, self-interested (not yours), simply wrong, and/or just plain rubbish.
Many people have inadequate knowledge and skills about personal financial planning and personal investing.
Some of the saddest financial stories concern naive older people who get robbed of their lifetime savings by some smooth-talking, slime bag financial scam artist. These fraud victims have no way to recover the lost lifetime assets. Before the fact, they needed to know better to avoid being duped. However, they lacked the knowledge, skills, and judgment to know better, when it really counted for them to know how to protect themselves.
Is it reasonable to expect that you would have such expertise? You may be an expert in your profession or trade, and you may earn substantially more than you need to meet your current expenses. The dilemma is whether and how you will also learn to manage, grow, and protect your financial assets, as you focus on earning income and saving from your real-life career. Nevertheless, when you develop your financial expertise, you will increase the chances that your assets will grow sufficiently to fund your family’s future financial needs.
Personal financial planning and investment management requires knowledge that is different from one’s professional and career skills.
Many people do need help from financial planners and investment counselors, even if they can handle their own more simple tasks like filing taxes online every year. Frustrated with complexity of personal finance and investing, they want to find someone they can “trust.” They base their advisor selection decisions on the “trust” recommendations of friends and colleagues. Then, they want to hand over the keys and let someone else drive.
Unfortunately, the entire financial services industry uses a “we are worthy of your trust” marketing message. Much of the trust that individuals have is misplaced and ill-founded. It is difficult to find another service industry where so much is paid for so little genuine value in return.
Personal financial planning and asset class investment management advice from the financial services industry is often shallow and inappropriate. While advice might seem plausible, many financial industry recommendations are simply not good for you. The financial services industry writes its marketing material to sound reasonable to individuals. Some recommendations are reasonable, but many are not.
The vast majority of personnel in the financial services industry are taught how to sell the most profitable financial products. Relatively few genuinely understand finance and investments from the perspective of what is really best for their clients. Even fewer have an incentive to act in the best interests of their clients. The interests of the industry and its customers very often are in conflict. In an unfair fight, the financial services industry will win, as it delivers excessively expensive and overly risky financial products to its overly trusting clientele.
Naive trust, faith and hope are not a reliable path to financial success, when you are dealing with the financial services industry. There are simply too many potholes, conflicts of interest, and hands in your wallet. The only practical solution is for you to increase your personal investment knowledge and skills.
Please click the Sitemap link at the top of this page to find and read about the other steps in this 10 step Family Financial Planning Process.
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Financial Planners in Pasadena California
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 how I am compensated, I charge solely on a fixed fee or hourly fee for service basis, under a contract agreed upon with you. You do not have to pay any form of asset fee. Furthermore, in the interest of avoiding all conflicts-of-interest, I do not accept compensation or commissions of any kind from the financial services industry.)
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Pasadena Financial Planner
Information from the financial services industry furthers its interests, as brokers and financial counselors sell risky and expensive investment products and financial services to you.
For example, when hundreds of broadly diversified mutual funds and exchange-traded funds (ETFs) are available at extremely low costs, there is ABSOLUTELY NO GOOD REASON for individuals to do so much buying and selling of individual securities. Yet, millions frantically buy and sell equity securities in efforts to beat the market.
Egged on by the financial media and the brokerage industry, millions of people waste huge amounts of their valuable personal time in these pursuits. Most will fail miserably in their efforts and will suffer substantially increased risks, costs, and taxes in the process. Most will obtain substantially inferior performance results relative to the performance of broad securities market indexes.
Yet, the vast majority will never bother to check their net performance against passive benchmarks. They will just keep trusting and never really know how very badly they have done compared to a passive investment program that would have required far less time, less risk, lower taxes, and much lower industry fees.
Individual investors need to do a much better job of distinguishing personal finance and investment planning fact from fiction.
They need to base their decisions on financial strategies and tactics that have been validated scientifically. Individuals must become better informed. Otherwise, they must rely naively upon the supposed goodwill of investment counselors and financial advisors who have very strong incentives to sell expensive financial products to them.
When you deal with a broker, investment counselor, or financial advisor, the financial products they recommend will almost always far more expensive than necessary. You will be sold the dream of better results, while most often the reality in the future will be the opposite. In this very costly environment of “advised” personal finance and investing, depending upon the goodwill of industry representatives can be a very risky strategy.
Significant danger exists in not understanding certain fundamental truths about the financial services industry itself. The structure of the financial services industry creates costly conflicts between the financial interests of individuals and the profit motives of companies in the industry and the self-interest of its sales agents. These financial conflicts of interest are a much greater threat to the welfare of individuals and their families, than is the potential for outright financial fraud that rightly concerns so many people.
The securities industry sells investment products that add substantial and unnecessary costs that are not in the interests of their clients.
Individual investors, sometime referred to as “retail investors,” will never find “free” risk-adjusted investment money lying around. Interactions with the financial markets are a “zero-sum game” before costs and taxes. With all costs and taxes, dealing with that financial industry is a “negative sum game.”
In the short-term, the size of the securities market pie is fixed. When one party gets more, another gets less. In and of themselves the securities markets do not create value, but the industry can siphon away a significant portion of an individual investors’ potential returns through visible fees and hidden costs.
Of course, the capital markets provide an extremely valuable economic contribution to our world through the generally efficient allocation of capital. However, this role does not necessarily mean that investment profits will be shared equitably between individual investors and the financial services industry. Retail investors and the financial industry are in competition with each other over how to split this fixed short-term pie. Investors who understand this conflict can better ensure that they get a more reasonable deal.
The good news is that modern financial markets are competitive and relatively efficient asset price setting mechanisms. This means individual investors cannot consistently “beat the market” on a risk-adjusted basis. While this might disappoint some investors who believe they are smarter than others, in reality this is very good news. On the opposite side, the good news is that competitive and efficient markets mean that individuals need not be beaten badly by the market either. Investor returns can track a market return quite closely at very low cost.
While beating the market is not a reliable strategy, individual investors can still make better decisions by choosing lower cost investment strategies.
Passive strategies targeting the market return do not provide an entirely free ride, because there is always a minimum cost. However, optimal investment practices do amount to a highly discounted ticket, which can get individuals to their financial goals quicker and/or richer.
Without optimal strategies, the risk-adjusted asset class returns of the average investor will lag the market return by a much wider margin. This lag will be due to the inferior gross returns of their sub-optimal investment strategies, which are primarily attributable to their unnecessarily high investment costs and taxes.
Therefore, at the outset, the crux of the matter is to learn what does and does not work in personal financial planning and investing. Accepting what you hear or read about personal financial strategies without demanding proof, is almost certainly the road to a much lighter wallet in the future.
Without adequate personal financial knowledge and oversight, delegating personal finance and investment decisions to industry financial advisers can be very risky to your personal and family financial welfare. You will have to live with the consequences of poor or bad decisions long after your advisors have perhaps passed from the scene and even retired on their fees.
Naive trust, faith and hope are not a reliable path to financial success, when you are dealing with the financial services industry. There are simply too many potholes, conflicts of interest, and hands in your wallet. The only practical solution is for you to increase your personal investment knowledge and skills.
Only through a lifetime of taking personal responsibility and intentionally educating yourself will you learn how to earn, save, and manage your money. Without similar earnings from self-employment or professional wages and salary, one cannot even start to save and invest. And then, only by taking personal responsibility will you learn to navigate around the amazing number of potential pitfalls associated with personal financial planning and personal investment management. Excessive investment costs are one of these pitfalls.