Strategic Financial Planning

Posts Tagged: investing

June 14, 2010

Give me the fly swatter, please

This time of year always brings unwanted guests in my home. Not relatives, but insects. It’s peak time for flies and mosquitoes as the temperatures heat up. Determined to remove the pests, I visited my local big-box home store on a simple mission to buy a fly swatter. Once there, I was overwhelmed by all the gadgets for killing bugs. The technology invested in defeating pests is amazing, from zappers to traps to supersized citronella candles. But did I find a fly swatter? Nope.

Being a financial planner, this led me to thinking how often investments are complicated even though investing should be simple. All sorts of products have been developed to confuse us and rip away our confidence in putting money in a certain investment. My grandparents had simple options. Everything was done at the local bank. Now there are mutual funds, annuities and exchange-traded funds in all flavors. What’s an investor to do?

If you make a simple investment – a fund or fly swatter – things are a lot easier and the instructions a lot shorter. Not to mention the dangers of not knowing what you are buying.

How can an investment be simple? Start with the fee it charges. The lower the fee the more likely it will be simple. An exchange-traded fund invested in a set index of small companies will have a lower cost than a similar fund managed using a system developed by a so-called investment guru. That’s because you are buying something that requires little maintenance, won’t break down and is easy to operate – just like the fly swatter.

Second, investments that clearly spell out what your money is invested in and how make things easier. The prospectus for a bond fund will list the bonds so you know what is being bought and how much. More complicated investments list where the money is going but if they frequently change, the cost is likely to be higher, and the investor may not know what the investment is holding today. Funds that index investments seek to maintain a percentage of an investment without jumping in and out of different investments. This keeps costs low, too, because you don’t have to worry about replacing investments – just like the zapper that will eventually break or need a part. How many fly swatters break down?

So the next time you look at an investment, ask yourself are you buying the high-tech complicated gadget hoping it will work, or are you sticking to the tried-and-true fly swatter?

Filed under: FYI For Your Finances — Tags: , , — strategicfp @ 6:06 pm

April 22, 2010

Do you have a financial disaster plan?

With recent economic trends of higher consumer spending and healthier stock markets, many Americans are pointing to evidence we are out of the recession. Looking back, the recession did change some people’s financial habits, but the resurgence in the economy unfortunately means most people are returning to their old ways of saving and spending, which aren’t always wise.

With the stock market higher, more people are returning to investing. That’s good news to the market but not to personal returns. Many people rejected investments during the recession, which created the best investment opportunity in many of our lifetimes. Investing now that the market is higher only means the returns will be smaller as there is less room to grow.

The same thing with spending is resulting. We may be spending more, however prices are not as low as they once were in many cases. Stores have stopped discounting heavily because shoppers are returning.

Still, the recession has changed some of our habits. Many of us are now valuing frugality as a permanent part of life versus just resorting to it at times. Like in the 1930s, Americans became scared after all the suffering and were permanently changed to keep as much as they can for fear they will lose it again.

But the ones who remain frugal are the minority, according to market research firm Decitica. It found 20 percent of Americans remain frugal after a recession. Meanwhile, 30 percent return to their previous spending levels. The other half don’t change at all, either because they can’t (they don’t have enough money) or they don’t need to (they have enough money).

This research indicates that most Americans don’t change much after a recession and are likely to end up where they once were. In other words, many of us don’t plan for recessions; we just ride along with them.

Putting together a recession plan is a neglected strategy in financial planning. Budgeting and coming up with a plan of action when money is tight is a valuable practice to get in the habit of doing. This would include building and maintaining an emergency fund to cover expenses during a financial disaster such as a job loss. Another wise move would be to have saved money for purchases when the stock market and prices go down. A good financial planner will present these different scenarios to help draw up a financial disaster plan.

With what many Americans have just gone through, knowing what to plan for is a lot easier.

Filed under: FYI For Your Finances — Tags: , , , , — strategicfp @ 6:44 pm
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