Narrowly Framed Questions Fail to Meet Life Goals (2006-10-30)

Narrowly Framed Questions Fail to Meet Life Goals

(2006-10-30) by David John Marotta

The marketing of financial products has caused investors to focus too narrowly on the details of specific investments. As a result, most investors fixate on asking the wrong questions and fail to ask the strategic questions necessary to tailor their investments to best reach their life goals.

The financial services industry has been largely built around selling financial products. This is an unfortunate history and has produced financial salesmen who are sometimes more interested in describing the attributes of their newest 5-star mutual fund or top-rated annuity contract than in listening to your life goals. And, even those who do listen can rarely meet your goals using only their commission-based wares.

A good advisor begins comprehensive financial planning by understanding your personal goals, attitudes, and values. Every financial decision and investment should be made within the bigger context of your life's goals.

Financial planning begins with the question "What are your life goals?" We have clients who answer that question in very different ways. As a result, we structure their finances differently.

For example, a client may be interested in having enough assets at age 50 to leave their job and become an entrepreneur. Another client may be most interested supporting specific charities. A client with a successful family business may want to structure their estate to preserve the value and integrity of that business for future generations. Another client may wish to provide an endowment to cover college education costs for their grandchildren.

Each of these clients would need different investment vehicles, asset allocations and specific investments to best meet their objectives. Purchasing investment products in isolation from the larger context of your specific life goals is like pushing random buttons on a vending machine in order to provide a Thanksgiving dinner for your family.

In financial psychology terms, this error is called "narrow framing." If your investments are not tied directly to your life goals, you and your advisor could be making this common mistake.

Letting your goals drive your investment decisions will mean you stop asking shortsighted questions like: Is this stock/fund a good investment? What industry is set to do well in the next year? Where is there real money to be made?

Instead, you will start by asking questions that are specific and personal such as: Am I saving enough each month? What target asset allocation will best help me meet my financial goals? How much I can safely spend this month and still have money when I reach 100? What has been the time-weighted return on my investments over the past few years?

If you don't have a target asset allocation tailored to meet your goals, or if you haven't rebalanced to that target recently, you may need some objective strategic advice that isn't driven by selling you more products. If you know how the individual investments you own are doing, but you don't know the time-weighted return of all your investments as a total portfolio for the last year, you may need to step back and look at the bigger picture.

Our firm resists giving advice about specific investments without first understanding the big picture. You should seek professionals who provide comprehensive advice in the strategic context of your specific situation and objectives.

If you put too much focus on picking the right investments, you are liable to do the wrong thing with your portfolio as a whole. It is easy to be like a gambler who regrets betting so much on an individual hand of poker rather than regretting sitting down at the table in the first place.

Strategic financial planning begins with your specific life goals. These could be as simple as wanting to retire at age 55. Most likely your goals are much more complex and detailed. Only after your goals are understood, should your advisor begin tailoring an asset allocation to meet your goals.

Once your asset allocation strategy is mapped out, then specific asset classes can be put into action. Certain types of investments are better suited for different types of accounts. From there, the blend of different individual investments can be selected in each specific account to keep expenses, taxes, and volatility low - and returns high. For large accounts, a blend of stocks, exchange traded funds, mutual funds, and other types of investments are likely in order.

A vendor of specific financial products is ill-equipped to provide that kind of financial planning, selection and implementation. And, without a concern for the big picture, your investments decisions will likely be shortsighted. Just rambling in the general direction of your goal isn't a good financial plan.

To find a comprehensive financial advisor in your area who will sit on your side of the table and act in your best interests visit the National Association of Personal Financial Advisors at www.napfa.org, or call 1-800-366-2732.

from http://www.emarotta.com/article.php?ID=202