Most people include investments in their portfolio and consider them essential to building assets over time, no matter what their financial goals may be. However, ensuring they are the right investments — and determining your comfort level with risk to make certain your investments are aligned properly — is one of the first steps in structuring a personal financial security plan.
In our continuing series on Biggest Financial Planning Mistakes, this week we focus on Mistake #7.
Mistake #7: Not Managing Risk
A personal financial security plan integrates both insurance and investments. At the same time, it identifies the asset classes and allocations that best fit one’s needs based on risk tolerance. Managing risk is essential to a comprehensive financial plan.
According to Cullen Douglass, a CERTIFIED FINANCIAL PLANNER™ with Douglass Financial Services, factors that influence your risk tolerance include age, income, timeframe, rate of return, and what you intend to leave behind. “Your plan needs to be customized for you based on your ability to accept risk, and that’s a very personal process that we lead our clients through,” explains Douglass.
“I have a client who was five years away from retirement when we met. Eighty percent of his portfolio was in one individual stock,” says Douglass. “When he retires his goal was to convert that one stock to cash. What he was failing to realize is that at age 67 when he retires, he still needs money for 30 plus years — so why would he take all the risk now on one stock and get it in cash when he retires?” Douglass asks. What his client needed was an integrated strategy that lasts over 30 to 40 years, according to Douglass. “It’s not logical to take all the risk at one time and then assume no risk in the future, “ he explains. “Cash is the riskiest asset over 30 years because it’s guaranteed to drop in value due to inflation.”
Using a tool called the Personal Investor Profile as a guide, Douglass and his team of professionals at Douglass Financial Services located in Cool Springs, can help you create a plan that will protect against risk with products that include permanent life insurance and annuities, and an investment portfolio based on the recommended asset classes. Assets would then be invested in appropriate financial vehicles including stocks, bonds and mutual funds – within the recommended asset classes.
Douglass advises that the process also includes reviewing hypothetical risk and investment return scenarios to determine your comfort level with different levels of volatility, along with the asset amount you may be willing to assign to higher risk investments.
Douglass says that typically your asset allocation strategy will fit into one of five asset allocation models. The five models below designate asset classes based on your risk profile.
Conservative – Accept lower returns; reduce volatility. Asset allocation: 20% risk, 80% fixed income
Moderately Conservative – Modest growth with some risk. Asset allocation: 40% risk, 60% fixed income
Balanced – Preservation of principal and long-term growth. Asset distribution: 60% risk, 40% fixed income
Aggressive – Long-term growth; reasonable risk. Asset allocation: 80% risk, 20% fixed income
Very Aggressive – Higher potential growth; substantial risks. Asset allocation: 100% risk
“Risk-tolerance needs to be very personalized to your emotions and income needs,” says Douglass. “You don’t want to lose sleep because of the volatility of your account.” He adds, “It’s the basis of your initial asset allocation and can be updated as your personal circumstances change.”
To ensure your financial security for the long-term, begin now with the proper information and expert advice – from a CERTIFIED FINANCIAL PLANNER™. Cullen Douglass, CFP® and his team of professionals at Douglass Financial Services in Cool Springs has more than 60 years of combined industry experience.
Cullen Douglass, CFP® is a Wealth Management Advisor who focuses on complete planning including risk management, investments, estate planning, retirement planning and insurance. Douglass Financial specializes in comprehensive integrated financial planning, including:
- Personalized Financial Planning
- Investment Advisory; Products & Services
- Trust Services
- Wealth Protection & Risk Management
Just moved to Tennessee? Don’t delay in learning about Tennessee’s unique state laws. It’s not worth putting your spouse or children at risk. Cullen Douglass, CFP® & Douglass Financial Services can help you successfully navigate what can be murky waters.
Whatever your situation, if you have ten minutes, give Cullen Douglass, CFP® a call and take the first step in securing your family’s financial future. Douglass Financial Services is a division of Northwestern Mutual.
Click here to learn more about Cullen Douglass, CFP® and Douglass Financial Services.
To view our last article, Mistake #6: Lack of Tax Planning, click here.
Check with us next week when we discuss Mistake #8 in Biggest Financial Planning Mistakes.