Last week’s article covered four of the common mistakes pertaining to estate planning. This week we will cover four mistakes pertaining to Financial Planning, with the last two mistakes covered next week on tax planning.
The first of the financial planning mistakes is having or taking unknown risks. Everyone understands the risk associated with driving. There is a possibility (risk) of having an accident which may cause financial damage. Because of this risk, most individuals choose to purchase insurance to cover this potential loss. When the policy is being designed, we have the option to select the amount of risk we are willing to assume. Typically, this is the deductible. While auto insurance is for most individuals a known risk, there are some risks associated with our lifestyle that may also need insurance coverage. Those with a pool, boat, or aggressive or dangerous animal all assume risks associated with these choices. Choosing to own a pool but failing to take precautions to prevent unauthorized use may result in the owner being the subject of a lawsuit.
For older individuals, failing to purchase long-term care insurance may expose a family’s assets to the cost of care for a loved one. While long-term care insurance is more costly than auto coverage, the benefit is generally far more substantial. Many retirees could afford to replace a damaged vehicle should an accident occur; however, most still elect to have the insurance coverage. In contrast, should long-term care be needed for a year, the loss could be 2 to 3 times the value of many cars, and yet the willingness to purchase this type of coverage is not very high. Our health care system has extended the average lifespan of those living in the US, but sadly, the last few years are not always the highest quality of life.
While there are many unknown risks associated with lifestyle, there can also be unknown risks associated with investment products. Making sure each financial product is understood completely is critical in avoiding unknown risks. In this latest financial crisis, millions of financial products were sold that were recently developed and had not yet stood the test of time. Many bank and financial institutions were forced to arrange settlements when the products thought to be low risk incurred losses, and therefore, had for more risk than originally disclosed.
Losing track of bank accounts or small investment accounts is another mistake many individuals make. For those living in Tennessee, the Unclaimed Property site on the Treasurer’s web page may reveal a lost or forgotten account.
The third financial planning mistake involves failing to modify asset allocations. Investment markets change as does the economy. Failing to periodically review and correct allocations may permit small but aggressive segments of an investment portfolio to grow large. The growth of any segment is not the concern. However, failing to sell off the portion now in excess of the original allocation is exposing a greater share of the entire portfolio to potential decline. Periodically rebalancing a portfolio forces the investor to sell the segments doing well and buy into the segments presently declining. This forces selling when the value is high and buying when the value is low. This of course is the most basic investment strategy.
The fourth mistake involves not knowing when to buy or when to sell each investment. Creating a personal buy and sell rule may limit the chasing of a hot investment up or riding a purchase to its low. Setting these strategies requires greater understanding of investment strategies, the economy, and the market, as well as the individual investment itself. Not every stock will recover its lost value by the time the original investment is needed. Thus, there are times it is best to sell at a loss and place the proceeds into another investment with greater potential to recover or grow.
Mistakes will happen, but avoiding the most basic mistakes may save thousands over your lifetime.
For help with managing investment assets, contact me at Quality Financial Concepts or one of the other Certified Professional Planners in our area. To continue a personal quest for education, you can also view our website, www.goqfc.com. There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other tools all available for free.