Planning vs. Product – a no contest
Many people associate owning a particular product (the right product!) with – ‘How to succeed at investing’. There is some inbuilt computer that equates ‘the right’ selection and timing of product purchase with the secret to success or the silver bullet for fixing a broken financial life.
- It goes something like this, Prospect or client – to financial adviser:
Q – “I know you recommend financial planning, but what to you think of energy stocks (or some such product of stocks, or property, or commodity)?
A – “I don’t.”
Q – “What do you mean you don’t?”
A – “I don’t think about energy stocks”
Q – “But you most often pronounce the outperformance of stocks over other assets.”
A – “Yes.”
Q – “So what do you think of me owning more Genesis?”
My Q – “Why did you buy them?”
Their A – “The recent issue.”
My Q – “Yes – But why did you buy them?”
Their A – “I thought they might be a good investment.”
My Q – “What for?”
Their A – “As an investment.”
My Q – “Yes – But at the risk of my appearing somewhat lacking in social etiquette – can you tell me what you hoped to achieve by your original purchase of Genesis stocks and what you would hope to achieve in purchasing more of them – or in fact more competing firms in the same sector in the same country?”
Their A – “I read some of these reports.”
My Q – “Where?”
Their A – “Various places.”
Now dear reader, you might feel this is a dramatisation. I can assure you it is not. Stories differ but a theme remains.
- Q – “I bought an apartment in the block over the road – what do you think?”
My A – “About what?”
Their A – “Apartments as investments.”
My Q – “Why did you buy it?”
Their A – “As an investment.”
My Q – “Yes – but why. What’s it for? When’s it for? Who’s it for?”
Their A – “To make a gain. We are getting close to retirement and we thought their presentation made sense.”
My Q – “Who’s presentation?”
Their A – “The development people.”
- Q – “What do you think Gold will do?”
A – “I don’t.”
Q – “What do you mean you don’t?”
A – “I don’t think about Gold as an investment.”
Q – “Well, you call yourself a financial adviser.”
A – “Yes.”
Q – “Well what about Gold?”
A – “What about it?”
Q – “What do you think it will do in the future?”
A – “I have absolutely no idea – But I can tell you what it has done in the past.”
Q – “What’s that?”
A – “The same as inflation.”
I’m not expecting to convince everyone that there are specific considerations fundamental to financial security. Nor do I wish to represent all. Thankfully we each have choice. For those who are interested in a philosophy, principles and practices – then the following is not a bad approach, and order is important.
Purpose – Why invest. What for. When. How much. Who for. Get specific.
Risk – What’s your attitude and capacity for risk (investment and insurance), and what are the real risks – like inflation (future purchasing power), leverage and institutional risk (finance companies), sickness, accident.
Return – When you know your financial expectations for the future you can then determine what return is necessary from your savings and investment – at whatever level of risk (which will determine what products to use).
Costs – Costs are important. Tax, fees, inflation. Understand them and equate with risk and return. (You cannot have low risk and high return.)
When you answer or consider the purpose, risk, return and costs questions – an adviser is in a position to make recommendations on strategy.
A strategic financial plan consists of three parts:
Bank
Investment
Insurance
or Cash Management, Investment Management and Risk Management and their alignment with your values and goals.
Bank A) Allocate resources from source (fixed expenses, variable, goals)
B) Build a cash reserve
‘feeling’ C) Control. The feeling you get from managing this well (income and
expenditure)
D) Debt management and consolidation (HP, cards, mortgage, loans)
Investment A) Asset allocation, what proportion (Cash, Property, Business, Bonds,
Stocks, Speculative)
B) Balancing – back to original risk and asset allocation status and building a
portfolio to suit.
‘feeling’ C) Confidence. The feeling you have from growing financial literacy
D) Diversification – not having all your eggs in one basket. Reducing volatility
Insurance A) Asset protection by offsetting risk to an insurer (House, Car, Contents)
B) Building an accumulation fund to protect lifestyle in retirement (KiwiSaver,
SSRSS)
‘feeling’ C) Certainty – gaining peace of mind
D) Disablement of income through accident, illness or death – insure or
manage.
Whilst buying products in each of the three strategies will occur – their purchase is considered with respect to your purpose. You know what outcomes you would like – you therefore know what ‘inputs’ are required to best achieve them, but no one can ‘guarantee’ your outcomes.
Planning versus Product – a no contest.
And of course an apartment or stocks in energy companies may be part of the solution.
The information provided in this blog is not intended to be a substitute for professional advice. You may seek appropriate personalised financial advice from a qualified professional to suit your individual circumstances.
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