Editor’s Note: Scanlon will discuss the “The Seven Sins of Personal Financial Planning” on Jan. 19 at an event sponsored by the Manchester Chamber of Commerce.
Does your presentation follow the Seven Deadly Sins? If so, what is the deadliest sin of personal finance?
The Seven Deadly Sins are lust, gluttony, greed, sloth, wrath, envy and pride. The Seven Sins of Personal Financial Planning do not follow the Seven Deadly Sins exactly. With that said, the deadliest sin of personal finance is not having a written financial plan. Without a written financial plan, you will significantly decrease the odds of achieving your financial goals. This isn’t to suggest that you won’t be successful, perhaps you will. The issue is that you won’t know how you’re doing, as there aren’t any goals and benchmarks to compare yourself with.
There are, however, many people that do not have a written financial plan. It is difficult to understand why this is the case. Clearly we live in a fast paced society and many people don’t make the time to address this important issue. We are, however, talking about your financial future. It’s interesting that many people spend significantly more time planning their vacations than they do their financial future.
Your financial plan can be as simple or as complex as you’d like to make it. “Simple” usually works best. Make something too complicated and many people can’t or don’t have the time to follow it. Our lives are already busy enough. Although we don’t want to make things too complicated, your financial plan should definitely be more comprehensive than scratching it out on the back of a cocktail napkin. On the other hand, having a hundred page boilerplate financial plan typically isn’t very user friendly either. After these huge plans are finally completed they tend to just sit on a shelf or in a desk drawer collecting dust.
When designing your financial plan it’s important to have a document that you can work with. This document will be your financial blueprint for where you want to go financially and how you’re going to get there. Yogi Berra, the former Yankee catcher, said, “If you don’t know where you are going, you might wind up someplace else.” It’s the same with your financial plan. Do you know where you want to go? Will you have a financial plan that’ll help achieve your goals and objectives? Or will you just take whatever life gives you?
Are personal finances changing with the slowly improving economy? Are people returning to the stock market for investing?
For some people their personal finances are changing. It wasn’t that long ago that, well, some people thought the world was coming to an end. The economy has been improving very slowly. The stock market has had a tremendous run up since its March lows. It appears that the more stocks rise, the more investors want to invest.
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I’m familiar with somebody who held onto a stock way too long for sentimental reasons because her late husband worked for the company. Do emotions play too big a role in personal finances?
Emotions do play a role in personal finance. The two primary emotions are greed and fear. Many people get greedy during a Bull Market. This is when investors just can’t seem to own enough stocks. Then when a Bear Market kicks in, investors start running for the hills. Fear takes over and everyone is dashing towards the exit signs. This encourages investors to do the exact opposite of what they should be doing and what they do with most every other facet of their life. Investors shouldn’t invest contrarily with their whole portfolio. Remember, everything in moderation.
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Sloth is another deadly sin among the Seven Deadly Sins. Does inactivity hurt people financially as much as being too active in trying to manage their finances?
The amount of activity that is needed is a difficult question to answer and it will be different for every investor. Keep in mind, the more investor trades, the greater their rate of return needs to be. How so? First are the transaction costs of buying and selling. Even with commissions declining there are still transaction costs. Second, for investments in a taxable account, there is income tax to be paid on any capital gains incurred. With individual stocks, the investor controls the timing of the buying and selling. Mutual fund investors are delegating this responsibility to the mutual fund manager. For most investors this is probably a good thing.
Does this mean that investors should never sell their stocks or mutual funds? Of course not. The investment arena is constantly changing and investors need to be abreast of what is happening. Not down to the latest tick on your favorite stock, but you do need to be aware of what’s happening with your investment portfolio.
What are some of the reasons to consider selling some equities? First is a significant change in the fundamentals of a company. For stocks this could be a change of the CEO, a merger announced, or perhaps a dividend cut. With mutual funds, it could be a manager change, significant style drift or just poor relative performance. Another reason investors sell equities is they may need cash. For example, retirees may be selling their equities periodically. If they have a diversified portfolio they will be maintaining some cash and fixed income exposure. This assures they won’t have to sell their equities at an inopportune time to generate cash.
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