Spring 2007 issue of Horizons

FOR YOUR MONEY

Commitment To Your Financial Plan Some people spend more time planning their annual vacations than they doplanning for retirement. Developing a sound retirement or financial plan, however, should not be an unduly burdensome task for those who are committed to the process. • Commitment to starting the planning process • Commitment to sticking with the plan • Commitment to reviewing and revising the plan when necessary The first and obvious step to getting ahead financially is to get started. The planning process generally begins with getting a handle on your goals and objectives. When do you want to retire? How much do you need to retire? What are your spending patterns? Do you have education expenses you will need to fund for children? These and other questions need to be asked and analyzed in order to integrate your personal life into your financial life. Engaging a professional advisor on the front side of the planning process is generally a good idea. A professional advisor can help you identify your goals and objectives as well as assist you in avoiding inefficient strategies and emotions that could lead to poor decisions. Once you commit to start the process and analyze your goals and objectives, you must develop a plan and be committed to sticking with it. Assets are merely a means to an end. Part of this planning process involves determining how to invest your assets to achieve your goals and objectives. Determining how to invest your assets is sometimes referred to as “asset allocation.” Commitment to implementing a financial plan falls into three main areas:

Asset allocation involves dividing your assets among different categories, such as stocks, bonds and cash. The process of determining which asset mix to hold in your portfolio is a personal one. It is also likely you will have multiple portfolios for your various goals and objectives. The asset allocation that works best for you will largely depend on your investment time horizon, financial condition and ability to tolerate risk. • Your investment time horizon is the expected number of months, years or decades you will be investing to achieve a particular financial goal. An investor with a longer time horizon may be willing to undertake a more aggressive investment strategy because he or she has time to recover from any losses incurred during poor economic periods. • Risk tolerance is your ability and willingness to lose some or all of your original investment in exchange for greater potential returns. Conservative investors like “a bird in the hand,” while aggressive investors seek the “two in the bush.” Although there is some degree of risk in any financial plan, a well thought out plan should attempt to mitigate unnecessary risk. One way to mitigate unnecessary risk is through diversification. Diversification is achieved through asset allocation, or how your investments are divided between stocks, bonds and cash. Choosing a sensible asset allocation strategy and having the discipline to maintain that allocation are the real keys to achieving successful long-term financial results. Once a financial plan has been put it place, it needs to be reviewed and monitored. At times, it could make sound financial sense to change your asset allocation. One of the more common reasons to change your asset allocation is because your investing time horizon has changed. As you get closer to retirement, you may not need to take as much risk as you have in the past. Therefore, your asset allocation may invest more heavily in bonds and cash equivalents as opposed to stocks. An asset allocation may also need to be changed because your financial situation has changed or your personal goals have changed.

5 u summer 2007 issue