Stock Market Playbook

Investing is a serious endeavor and that is why many people “outsource” this to wealth management professionals. However, there are some principles that I believe everyone should be aware of and understand. I covered some of these in the last two blogs. Today I want to provide a playbook on how to proceed whether you use a professional or choose to do it yourself.

Much of the following has been posted earlier but I thought this is a good time to put it together and repeat it since things have changed substantially with interest rates. Here is my 13 step playbook to use to plan for your personal financial security.

1. Purpose of planning: Write down the purpose of why you want to plan. Review it to see if it is realistic and addresses your overall big picture concerns.
2. How much you spend: Determine how much you are currently spending a year, and how much you likely would be planning on spending at later intervals in your life.
3. Short-term goals: Write down what you want to accomplish over the next few years.
4. Long-term goals: Write down longer-term goals. Based on your age and situation, this could be five years from now, or twenty-five years.
5. Risk profile: Write down what you understand risk to be about and how you feel about stocks, bonds, commodities, real estate and if you have one, your business. How do you view inflation as a risk factor? Ask yourself whether you already won your “personal lottery” and read about this in my prior blog dated June 20, 2013.
6. Cash flow: What is your annual cash flow and what do you expect it to be at various stages later in your life.
7. Net worth: Tally up your assets and debt. What is your financial net worth? Do you have a sensible way to pay down your debt, or get it under control? Determine the likelihood of your net worth growing and how it will grow.
8. Asset allocation: Based upon your goals, determine how much of your net liquid assets should be allocated to rainy day funds, stocks, fixed income and other broad investment categories and at what levels of risk. A comment about rainy day funds is that I’ve seen many clients increase this amount during the last year including some that increased it from a six-month comfort level to three years. Do whatever makes you comfortable.
9. Relook at your asset allocation: Take another look at what you did. Does it make sense? Do your rainy-day funds reflect immediate and possible emergency needs? Make sure you are reasonably comfortable with the allocation categories.
10. Number crunching: Work out potential cash flow from your asset allocation. Estimate expected interest, dividend and stock appreciation rates. Include income from your job or business, Social Security and pensions. Be realistic about income but stay on the low side. If your income estimate is too low, you won’t get hurt; if it is too high, you could be hurt! Overestimate expenses for the same reasons.
11. Whether goals are attainable: Match the cash flow against how much you spend and plan on spending. If there is a shortfall between your expected cash flow and spending, you should consider adjusting your spending, increasing risk, working longer, or even getting another or a part-time job. What many people do not realize is that financial goals are behavioral. Spending can be controlled or curtailed to accumulate funds that will enable future goals to be attained, or your goals can be altered. For instance, a 52-year-old might want to retire at age 60 but because of the funds she presently has and is expected to accumulate she would not be able to retire until age 64. By curtailing certain spending and investing a little more aggressively, she can cut two years off and retire at age 62. It is then her choice to make additional changes in current spending or her retirement goals.
12. How to attain goals: Write out a clear plan based on everything done in the first 11 steps that shows how you will attain your goals. That will become your big picture plan that you should now follow.
13. Plans are road maps: Road maps point you in the direction you want to travel, but lots of time there are unplanned for turns, tie-ups or unexpected roads. The plan and goals will help you better maneuver those bumps and forced changes.

There is no easy answer, and it requires focus, deliberate thought and being realistic. I recommend that you write it down as suggested above. I have found this to be very effective and enables a more careful consideration of your situation and of what you understand and what you just do not know. Try it. My process works.

Good luck!

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