Building a financial plan is like building a home

Buying a home

As a financial planner, we talk in numbers and make it sound so simple.  If you want X in the future, you have to give up $Y now in spending.  

Are those choices easy to make though?  

Financial plans are based on assumptions, and the outcome of the plan can seem distant and uneasy to grasp.  So I compare it to building a home.

Where will you build? How many bedrooms? Two floors or one? With a pool?  Before you can hire the architect to put together a design, there are a ton of questions to ask yourself.

In the financial plan process we start with defining and thinking about all the angles of your financial life and what you want.

By identifying your current, mid-term, and long-term goals, you set the blueprint for what the house looks like.  You proverbially map out room sizes, doorways, and other details.

With this information, the builders can start their work. Determining how much cement is required for the foundation, how many beams are needed to create the walls based on the floor plan, etc.

Your goals will inform how much in savings and investments you need to make now to complete your goals later.

Once the builder knows how many pieces are required to complete the home, you receive a basic cost outline for the structure.  Can you afford the basics?  Maybe once you’ve seen the outline you decide you don’t really need a second guest room.  How often will you have guests over anyways?

Next comes the interior designer.  You chat about cabinet finishes, wood flooring, and whether brushed bronze door knobs or the standard silver will do.

Knowing the costs now help you prioritize what you value most in the home.  

What do you value about building your own home?  Was it about the location?  Did all the other homes have two bedrooms but your family needed a third bedroom?  

Then, if you get a bonus or raise later, you can decide where to add flexibility.  Maybe you will start with carpet and standard silver door knobs, and then upgrade to wood floors and brushed bronze door knobs.  If it happens, great – but if not, it doesn’t affect your most important value of being in that location.

Every decision you make is a trade-off between current and future expenses.  Future expenses are the savings and investments you make now to be ready for these expenses later.  

You are always making these decisions.  Even not making a decision is a decision in the end.

Financial plans start with knowing your values, identifying your goals, and establishing priorities.  What kind of life do you want to build?  

Schedule a consultation to see how we can help.

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.

RSUs in your investment portfolio

If you receive a large grant of RSUs or company stock, you will have many risks. Risk of termination before vesting, risk of market volatility in stock price, and asset concentration are a few. You will need to decide whether you will keep the stock once vested, or if you prefer to sell the stock at vesting date.
Concentrated Positions
A concentrated position occurs when you have a large amount of your finances wrapped up in one company. This can cause problems by increasing risk in your portfolio, causing tax issues, and liquidity needs. These risks compound if you have a long time horizon for your investment or your tolerance for risk in your financial plan is different.
Holding onto your company stock can leave you very dependent on one company’s success.
Chances are your salary, your 401(k) match, and your stock compensation are all tied to one company. This one company can ‘make or break’ your future financial freedom based on how well they do.
 
Example: If a competing product comes out, this may drop your stock value and require lay-offs longer term. Many smaller tech companies realize this pain when Amazon or Google announce a competing tool. The stock can plummet by 50% within a week.
Example: If a company ends up like Enron or WorldCom, then the drop may even be worse – wiping out your earnings and stock value completely. It may be hard to think this could be your company when we tend to be overconfident when we have an insider perspective on our employer’s prospects.
 
In these price drop scenarios, you may have paid significant taxes on the vested stock already as well.
On the flip side, if you hold on to the shares and the company goes gangbusters, you may also have significant capital gains accruing. Selling the entire position may not be tax-efficient and cause you a different headache.
Diversification
Holding a large position in one company stock exposes you to higher risk of large movements in the stock price from day to day. Diversification is used to help investors choose a portfolio that offers the best return for a given level of risk. Why take on more risk than is necessary to achieve a given level of return?
A diversified portfolio is based on academic research into the disciplines of economics and finance. Research holds that investing in many different asset classes (i.e. emerging markets, U.S. large cap funds, etc) and in many companies within an asset class will reduce your investment risk. This seeks to avoid damaging investment performance by the poor performance of a single company stock or asset class.
 
At SeedSafe Financial we practice diversification for long term success.  Find out more about our investment management services and consider giving us a call.
 
Find out how diversified your portfolio is through our free online tool.
 

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
If you live in a state with it’s own form of state AMT, this further complicates the matter. AMT calculations can be difficult and you may need professional help, such as that of an accountant, tax attorney, or someone experienced in complex tax returns.

Our Attention Span and Money

The average attention span and short-term memory recall has declined over the last ten years.  Some say it’s due to our ability to look up anything we need so our brains no longer find it a vital function.

Either way, I have strong memories of 9-11 and the 2008 crash.  I can remember exactly where I was, what the room looked like, who was around me, etc. Why do I remember the bad instances so much more?

Human psychology is so much more focused on the bad due to evolution.  Those who remembered the poison berries another ate lived longer.  Remembering bad moments in great detail allowed us to survive a longer time.

Thanks evolution – you take away my good memories and attention span and leave me with the bad ones?!

So what does this mean for today’s millennials?

We remember what it felt like and what is looked like, but we didn’t know the problems were primarily at home, and not worldwide.

The table below is a great example of how different types of stock (U.S. large stocks, U.S. small stocks, emerging markets, international, real estate, etc) can widely differ in performance from year to year.

Follow the S&P 500 (U.S. large companies stock) for example.  In the late 90s the S&P 500 was on a roll, and then when 2000 hit it became one of the worst performers for the year.  Each year is different and you won’t always know what makes it out on top.

JP Morgan returns JP Morgan returns from JP Morgan Quarterly Market Review, Q3 2024

Looking at the changes in this 10 year period of time, I can only imagine how frustrating it must be for new investors.  How can you consistently pick the right asset classes for greatest return?

In my mind, you can’t.  This is why I believe markets are efficient and few investors can outperform, because it is all priced into the stock over time.

This allows me the freedom to ask:  how do I protect and maximize my return while reducing the likeliness of large jumps like the S&P 500 in the above table?  I do this by holding a portfolio of many types of stock.  When one type dips, I have another that may rise in value or help counteract the effect.  Thus providing a more stable return over time.

So what about keeping my money in all cash?  There is no risk to that, right?

I am all for maintaining an emergency fund based on your lifestyle and needs in cash.  I also believe large expenses in the next few years are better left in cash.

However, I do believe there is a strong argument for investing into the stock market to combat long-term inflation.

Remember when you could get gas in the 90s for less than $1.00?  Remember when bread was less than $1.00 and you could scrape together a lunch with the change you found in your parent’s stash?

The changes over the last 20 years are a prime example of what could happen to your cash pile over the next 20-30 years.  In fact, we’ve seen inflation every decade since the 1940s and only over the last three years did it momentarily slow down.[1]

Our memories can be fickle friends and keep us from making good long-term decisions.  Adding to an already emotional topic – money.

If you are interested in talking to someone about growing your wealth, start now and schedule a time for your free 30 minute consultation with me.

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.

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[1] For more information and a great chart, check out InflationData.com, “Average Annual Inflation Rates by Decade” by Tim McMahon on June 18, 2015

This post was inspired by the article in The New York Times, “Praise Is Fleeting, but Brickbats We Recall” by Alina Tugend: March 23, 2012 and the book Moonwalking with Einstein: The Art and Science of Remembering Everything by Joshua Foe