Member Article

The basics of financial planning

By Lawrence Cook, Director of Marketing and Business Development at Thesis Asset Management, http://www.thesis-plc.com

Financial planning, in its most basic form, is the practise of working out how to achieve the lifestyle that you would like to lead. What this means is sitting down and deciding what you want your life to look like in the future, for example, whether you want multiple properties around the world, or simply a cottage in the Cotswolds to retire to. Working out how much money will be needed to achieve this is the second step of the process. Although it may be difficult to predict the future cost of goods, such as house prices, in most circumstances a rough estimate is all you really need.

Once you have worked out what you want and how much finance you will need to achieve this, it is likely that there will be a difference between that number and the amount that you currently have. This gap is how much money you need to make, and, more importantly, when you know that you have made “enough”, a concept that many investors have struggled with throughout history. This gap, its size, how far in the future it is and what resources you have will determine how much risk you need to take. For investors, it’s tempting to want to get the highest return out of every penny that you invest.

This is not always the best course of action; there is a common acceptance in the financial world that opportunities that have the highest potential return pose the highest risk. If you’re hoping to buy that cottage in the Cotswolds when you retire, and you already have some capital ready to invest, you can probably take a very low-risk long-term view. On the flipside, that global property portfolio that you want to be able to enjoy whilst your kids are still young is going to require a much higher appetite for risk.At this point there are many considerations you need to be aware of and examine. Is the risk that you will need to achieve “enough” worth it? Do you compromise on some things, take fewer holidays, spend less, save more, work longer hours? Or do you invest more, or take more risk?

These questions can be difficult, but they are necessary. As we’ve seen, working out why you should invest and what your objectives are is the first major step in any successful investment career. These are the strategic questions you must answer before parting with your cash to any company wanting to invest your money. Analysing the risk in your portfolio is crucial to identify and mitigate risk, but can never be avoided completely. Fortunately there is a growing band of professional people who can assist with your financial planning. They can help you work out your current financial position and how much capital you currently have available. They can talk you through the different levels of risk and find where you are most comfortable, but can still achieve your goals on time.

Financial planners are experts in their field, and can advise you on where to put your money for the best outcomes. A good financial planner will charge for planning and advice separately from charges for investing the money. He or she will be able to provide you with a lifetime capital and cashflow plan that is unique to you and your life which will need to be reviewed at least once per ear to keep you on track, after all investments rarely behave in a predictable fashion.

Investors also change behaviours which will need careful attention, so if you start spending more/less, or change your objectives this should change the plan. So, whether you’re looking for a fast and flashy lifestyle, or chic and steady, appointing an expert to help you work out when and what your “enough” is, and how to achieve it will be absolutely invaluable.

This was posted in Bdaily's Members' News section by Lawrence Cook .

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