Having great performing investments won’t give you financial security if you don’t have a plan to protect them.
If you are like many individual investors, you may believe that picking what you consider the best investments to provide the highest return over time will be your ticket to the financial security you want. After all, wouldn’t that make sense? Shouldn’t the best performance mean the best financial outcome?
Unfortunately, it doesn’t.
Let me share a story with you that illustrates why the portfolio is not enough to provide for your best future, and the steps you can take that will provide financial security.
My dear friend Megan recently shared some terrible news. Her ex-husband, Ryan, with whom she shares two children, and maintains a good relationship, suddenly passed away. It wasn’t supposed to happen. What was supposed to be routine surgery went wrong, and he unexpectedly died.
When it comes to her profession, Megan is incredibly accomplished. In her field she is a known expert and highly sought after. And like many smart, accomplished professionals I know, she believes she can manage her own portfolio, choose her own investments, save well, and be financially secure. Even though she is a busy executive in another field, she sees no reason to seek out the guidance of someone who would charge for what she believes is easily accomplished with a few smart stock picks.
Many years ago when they were married, Megan and Ryan did work with a financial planner. In addition to providing investment guidance, he provided financial planning guidance. He made sure they had adequate risk management in place, like life insurance, a Trust, other protection for their hard-earned assets, and protection for their children in the event of need.
He helped them create a road map to reaching their financial goals, and helped them implement important steps along the way. In exchange, they could focus on their family, their professions, their lives. Critical here, is that he asked the questions to learn what was important to them, and he made sure nothing was missed that would harm their financial future. One of these steps was having the couple get life insurance, which has proved to be the saving grace for his children now in the time of need.
As life happens, Megan got divorced and reevaluated her relationship with her financial planner. At the time she did not understand the value he provided. She understood his purpose to be investment management, when in fact, he had provided oversight and guidance to her family to make sure mistakes were not made, they were protected in the time of need, and their hard-earned money would be protected. Yes, the portfolio plays an important role, but it plays a supporting role.
Why not pick the investments herself? Why pay for someone to manage her portfolio when she believes she could do just as well picking her own investments? In fact, even recently she shared with me how smart her new husband is when it comes to picking investments.
Why on earth would you need professional guidance when this is so easy?
Were it not for her former financial planner, this story would have ended very differently. There may not have been life insurance in place when Ryan passed. There may not have been a Trust that clearly defines how the children were to be supported in the time of need, and his assets would be distributed with a new wife in the picture. Without life insurance, and estate planning, and given the hostile relationship between the new wife and children, this would likely have involved litigation, depleting the portfolio. All the saving and investing in the world becomes meaningless when risk management is not in place.
Until this tragic incident, Megan didn’t see the value of professional guidance, or understand the true role a portfolio plays in your financial security.
Financial security comes, not from having a portfolio with the best performance, but knowing the planning steps to take to avoid mistakes.
Below are steps you can take to protect yourself and help you reach and maintain financial security:
1. Determine your personal, professional, and financial goals. Detail them out, prioritize them, know how much each of them will cost.
2. Know your ability to save for those goals. You can determine this by knowing what your lifestyle costs, and how much money is available to contribute to the goals that are important to you
3. Know where you are financially, right now. This means knowing your assets and your liabilities. Why is this important? If you have $250,000 in your 401k right now, but you need $2.5million, then you’ll need to have a strategy to get to where you want to be. This may mean balancing several different goals at once and knowing how best to contribute to each one given your income and time horizon for the goals.
4. Assess your risk. This means reviewing your insurance coverage to make sure you have adequate coverage on all assets, plus life insurance, business insurance and any areas that need to be protected. This also means having estate planning in place to make sure your wishes are respected and your loved ones protected in times of need.
5. Have a great accountant. Farm out the tax work to a Certified Public Accountant who will know the latest tax law changes, and how best to minimizes taxes given your situation.
6. And lastly, know your investment philosophy and how much risk you need to take to meet your financial goals. It’s not about the maximum your portfolio can return annually: It’s about what risk adjusted return you need to reach your financial goals. It’s about a well diversified, tax efficient, low cost, liquid, time-tested strategy based on your personal financial goals. When you know what your goals are, when you need to reach them, and how much you have to contribute to them, then you can put together your portfolio.
Without all the planning steps above, years of hard work, saving, and investing, may not provide you with the financial security you need. We see no better option than to work with a Certified Financial Planner.™ They’ll create a financial plan customized to you and your family’s goals and they’ll help you avoid making mistakes that will derail your financial security. Don’t wait for an unexpected event to happen before you see the value of financial planning in helping you reach, and maintain, financial security.
If you’d like to learn how we help female business owners with financial security, contact us. And if you’d like to learn more about how to take steps towards financial security on your own, you can find those in our book Corner Office Choices.
