Partners' Network

Common Sense Financial Planning Actions

Financial planning is about attaining future financial security. Here are five items that I believe every investor should understand. I further believe that financial security comes with understanding how your funds are invested so your ultimate goal has a high likelihood of success.

Foreign Stocks

Many investment managers include an allocation to foreign and emerging market stocks to provide worldwide exposure. I do not think this is appropriate because a well-balanced portfolio in U.S. securities includes that exposure. Using the S&P 500 index as an example, over 40 percent of the sales of the S&P 500 companies are outside the United States, along with assets supporting those sales. I feel that is significant exposure. By overweighting a portfolio with specific foreign securities or funds you are pushing the risks and coverage to over 50 percent. Also, any investment in foreign stocks has three added risks. That foreign market’s overall risk, the political stability of that country, and the conversion risk back to U.S. dollars of that currency. These are all managed quite effectively through the companies in the S&P 500 index with professionals whose only job it is. Why add an extra layer of management especially if it doesn’t reduce risk, but expands it?

Beating the Market

Most investment managers profess a secret sauce where they are able to manage a portfolio in such a manner that they will outperform everyone else, on a very consistent basis. It doesn’t work. Sure, some do, but they are in a very small minority. I’ve written many blogs about this and haven’t yet had any successful disagreements. Look at any manager’s performance over the last ten years and see how well they performed against the appropriate index for the type of stocks they managed. You do not need proof from me, you can get it from them if they will show it to you.


Stock trading is a business activity for professionals and not amateurs. Trading has become easier with many brokers charging no fees, but it is time-consuming and over time, a buy and hold strategy for a well-diversified portfolio provides better results than active trading. If that wasn’t the case, then most of the mutual fund managers would “beat the market.” Also, many of the large mutual funds have portfolio turnovers ranging from 30% to 200% a year. That means that they changed their minds about at least 30% of what they thought were good investments at the beginning of the year. Shouldn’t they have done a “better” analysis before they bought those shares? Most managers will tell you that better opportunities came along. That seems like a lot of better opportunities that they possibly should have considered earlier.

Investing For Cash Flow

Most people invest to grow the assets when in reality they should invest to have a sustainable cash flow when it is needed. This means developing a plan with goals and investing to accomplish this. Built into the goals should be future cash flow needs and how it will be generated.

Rainy Day Funds

This is the part of your investments that should be completely liquid and available in case of dire emergencies such as what we are currently experiencing with the pandemic. In this regard, cash is king. Whatever cash you feel is necessary to maintain your lifestyle should be set aside in what I call a rainy day fund and not be included as part of your asset allocation. However rather than sit idle, these funds can be invested in safe liquid accounts or certificates of deposit (CDs) that will mature at intervals when the cash might be needed to be spent. For example, if you feel three years of expenses are needed, then keep 1/6th in a bank account and ladder the remaining funds for 1/6th to come due at six-month intervals. If you don’t need the funds at each maturity date then reinvest them to come due six months after the last CD that you have matures.

These are some things to consider and usually are counter to what many investment managers suggest. If what I wrote does not make sense to you, contact me so I could hear you out. If it makes sense, then discuss it with your advisor.

A lot of investing seems more complicated and confusing than it is. Just consider one item above at a time and when you understand it, go on to the next one; and discuss it with your advisor for guidance based on your portfolio and plan. I think a lot of what I suggest above is just plain common sense.

All the best.

If you have any business or financial issues you want to discuss please do not hesitate to contact me at [email protected].

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