Twenty-Five Years of Financial Insights(Part 2: Finding Your Financial Balance)

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Part 2: Finding Your Financial Balance

In our last Educated Investor, I reflected on my 25-year history as a financial professional and shared one of the most important insights I’ve learned during the past quarter century: To preserve and build wealth according to your goals, you must save and invest. Today, I’d like to explore another timeless insight toward the top of my list of best investment practices.

Insight #2: To achieve financial independence, you must first achieve financial balance.

What is financial balance? Let’s start by talking about what imbalance looks like because, frankly, it’s far more common.

Buy this! Sell that! Beat the market! Flee the market! You see it everywhere on Bay Street and in the popular press. It tricks you into believing that reacting to the news is the only way to invest. Unfortunately, these sorts of hot tips may pose as relevant information, but they’re actually dangerous distractions, more likely to knock you off course than contribute to your success.

The first step toward achieving true financial balance is to determine what it is that you’re weighing. It’s not the market you’re assessing. It’s yourself. Financial balance comes from answering two main questions about yourself as precisely as you’re able.

Question #1: What kind of investor are you?
How much market risk are you willing, able or required to accept in pursuit of the wealth you want to accumulate or preserve? Investors typically fall into one of three broad personalities:

  1. Conservative – You are cautious about taking on market risk. That’s fine, as long as you accept that this means your expected future returns will be lower as well.
  2. Moderate – You are open to a mid-range degree of market risk in exchange for modestly higher expected returns.
  3. Aggressive – You are open to taking on a great deal of market risk as you seek a higher level of expected returns.

At The McClelland Financial Group of Assante Capital Management Ltd., we use FinaMetrica risk profiling software to help our clients weigh their financial wants and needs in this context. We also help them fine-tune the results, especially when there are conflicts between their inherent nature and their financial needs.

For example, you may be conservative by nature, but find yourself falling short of your financial goals as you near retirement. Or you may enjoy the thrill of the hunt, but you may be best off minimizing unnecessary risks if you’ve already blown past your financial goals.

Your investment personality isn’t static, either. In your youth, during your earning years and as you enter retirement, you may be more or less willing, able or required to take on market risks. The more familiar you are with your investment personality, the more likely you can achieve financial balance. Then, when breaking news about market volatility threatens to knock you off-course, it’s easier (if not always easy!) to stick with your disciplined plans and long-term goals.

Question #2: What kind of spender/saver are you?
Financial balance also calls for matching the type of investor you are with your spending and saving habits:

  1. Savers – Some people find it easy to save; it’s just what they do. This is usually an admirable trait … unless it’s taken to extremes. Since money is the means to an end, there’s no sense hoarding it with no end in mind.
  2. Balanced – As you might guess, the optimal position for most families is one that achieves a comfortable mix between saving and spending throughout their lives.
  3. Spenders – If you tend to be a prolific spender, it’s best to acknowledge it, so you can manage your investments and your lifestyle accordingly.

Financial balance falls into place when you align your investment personality with your saving and spending traits. For example, if you are inherently a moderate investor and a strong saver, you have improved odds for faring well over the long-term. On the other hand, if you invest conservatively but spend lavishly, you may run aground if your investment returns don’t keep up with your lifestyle. The goal is to avoid bad combinations of investment and spending habits well before they play out into bad results.

Achieving Financial Balance
As you can see, there are a lot of moving parts to consider in achieving financial balance. Different family members also bring different personalities into the mix. Plus, it’s difficult to be objective about your own inclinations. Let’s face it – we’re usually too close to the subject of ourselves to recognize our own best strengths and worst weaknesses.

If you’re lucky, all of the pieces in your investment whole come together naturally. From my experience, though, few investors are so lucky as to have that happen without facing some difficult realities and challenging choices along the way. That is why it has been my privilege for the past 25 years to help families focus on the importance of achieving and sustaining good financial balance in their lives. I hope to be doing the same for the next quarter century as well.

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