Creating Your Financial Plan

Working with an Advisor

We support the concept of professional financial guidance. Why? Because financial advisors are trained to help you determine your long-term investment goals, time frames, your capacity and tolerance for risk, and the types of investments most appropriate to help you achieve your goals.

We suggest you choose a financial advisor in much the same way you would choose any other professional. Rely on family and friends who have had positive experiences. If you get the names of several advisors, interview each of them. You’ll be making important, long-term financial decisions with their guidance, so you want to feel comfortable sharing personal information with them and be sure their approaches and areas of expertise are a good match for you.

Your Personal Goals

Your list of goals may include: saving for retirement, buying a house, starting a business, paying education costs for your children or charitable giving. But for each of the goals you add to your list, you’ll need to precisely define its costs, time frame and priority for you. As you go through this process, you’ll encounter a number of trade-offs as you prioritize and lay out a time line for your goals. Getting these details down on paper will allow you to work more successfully with your advisor to create a solid financial plan. And that can help you get to where you want to go.

What’s Your Timeframe?

When we talk about your time frame, we mean the time between when you make an initial investment and when you’ll need the money.

If your goal is paying college tuition for a 2-year-old child, you’ll need the money starting in about 16 years. If that child is 15, you’ll need the money starting in about three years.

Every investment has its own time frame depending on the goal, and the time frame can change as the goal approaches.

Why define your time frame? Successful investors make a point of defining the time frame for a goal before taking action. Because a clearly defined time frame helps when deciding which investment options are right for the goal.

If the time frame is short, financial advisors generally recommend more stable, less volatile investments. With a longer time frame, some short-term volatility may be acceptable.

Without a clearly defined time frame, choosing the appropriate portfolio of investments is a guessing game. And investing should be about making decisions that are right for your situation — not guessing.

Time frames change. It’s important to remember that in most cases the time frame of your investments will change. A goal that’s 15 years away will eventually be 10 years away, then five years away, and so on.

It’s important to reevaluate the time frame periodically because an investment decision that makes perfect sense with a 15-year time frame may not make much sense when your time frame reaches five years or less.

A financial advisor can help define the time frame for your goals, as well as suggest investments that are appropriate for them. And more importantly, an advisor can help you adjust your mix of investments as your time frames and life circumstances change.

Risk Capacity and Tolerance

Your comfort with risk is an important part of making investment decisions. Building a portfolio customized for your goals, time frame and risk tolerance can be a key to staying on plan, instead of reacting emotionally to the spikes of a volatile market.

Comfort with risk refers to how you feel about market volatility. Specifically, how will you respond when investment values decline unexpectedly? Will you fret over losses and sell your holdings to prevent further decline? Or can you remain calm and stick with your financial plan?

Capacity for risk is also an important factor. While you may have nerves of steel when it comes to market volatility, that doesn’t necessarily mean you should take big risks. Your capacity for risk is defined by where you are in your life journey, along with your plans and goals. That capacity changes as you get married, change jobs, have children, or buy a house. Each of these life events may change the way you think about your capacity to handle risk. Checking in with your advisor regularly can help you keep your financial plan in sync with all the changes in your life.

Examining your attitudes. To avoid a situation in which you respond emotionally to a volatile market, try to honestly assess your capacity and tolerance for risk and factor them into your financial plan.

Evaluating your comfort with risk doesn’t involve trying to change your feelings about money through logic or reasoning. The goal is to honestly identify them to help predict how you might respond to spikes in market volatility or losses.

Learning from your past. One way to start digging into the relevant emotions is to consider how you’ve previously handled setbacks or losses. These could be from any part of your life, including:

A close friend’s moving to another state
A promotion you wanted but didn’t get
The loss of a job

You might also want to ask yourself some questions specifically related to money and investing.

Does the thought of losing money worry you?
Is a reliable rate of return more appealing than a 50-50 shot at a much higher return?
What were your parents’ attitudes about money when you were a child?

Using what you’ve learned. Tell your financial advisor what you’ve learned about yourself and your comfort with risk. Together, you can weigh this information against objective investment criteria as you look to balance risk and return potential through diversification and asset allocation.

The right amount of risk in your investments can give you the confidence to stick with your financial plan even when the market takes an unexpected dip. But if you start feeling nervous or uncomfortable about your investments, be cautious about how you respond. A knee-jerk reaction can cause you to sell when prices are low, rather than hold onto an investment that has the potential to rebound and erase paper losses.