I always enjoy graduation season, as students don their caps and gowns and listen to commencement addresses filled with sage advice. Given my profession as a Certified Financial Planner practitioner, I am struck by how well this advice applies to one's personal finances. It's a reminder of the opportunity financial planners have to help people of all ages follow commencement words of wisdom, particularly seeking lifelong learning, sticking to your core values and finding trusted mentors.
Most young adults starting out in the 'real world' will be focused on immediate needs and goals, such as securing a job, purchasing their first car, living on their own and of course, paying off student loans. However, sooner than they know, there comes a point when their attention will turn to broader, long term objectives, such as creating a financial plan for life. That's when many of these commencement messages ring even truer.
Many people don't have a grasp of personal finance basics -- the difference between stocks and bonds, starting retirement savings as soon as possible or how to budget and manage debts. No matter your age or stage, seek out financial education. Many employers offer financial education, as do some local community colleges and city libraries. The more educated you are about personal finance, the more realistic and secure you may be.
In today's society, pop culture perpetuates a mindset that "greed is good." Coupled with the fact that there is an abundance of information in the financial world, navigating a strategic financial course can be challenging. Chasing market returns, trying to get rich quick and overreacting to the daily gyrations of the markets are mistakes that repeat themselves over and over like a broken record. In fact, studies of behavioral finance tell us people tend to behave in irrational ways and follow the crowds, even when the crowds are wrong, leading them to make unwise decisions when investing. A financial planner can help steer a steady financial course to sift through information overload and global market volatility. This helps to ensure that accurate information is being acquired, risks are managed and investments are diversified to reflect a long-term strategy.
It is a fallacy that a financial planner has a crystal ball and can time the market. Any relationship with a financial planner that is predicated on these assumptions is bound to be short-lived and disappointing.
So, what are realistic assumptions for you to have of a financial planner?
First off, they should get to know you as a person and understand your needs, wants and wishes. You should hear questions from them such as: What is your story? What are your goals? When do you want to retire? How much do you need on a monthly basis in retirement to maintain your standard of living? Only after understanding your goals can a financial planner build out the best way for you to get from point A to B.
Second, a financial planner should diversify your investments across asset classes and make sure your risk exposure is appropriate across the entire financial portfolio. Through the use of financial modeling, a financial planner can quantify the risk of a portfolio. You may think you are diversified because you have a variety of investments in your retirement portfolio, but some of them may overlap in terms of asset classes and specific holdings, increasing your risk exposure. Imagine that a financial planner is like a traffic cop in the center of a busy intersection, managing the flow of your investments to minimize the risk of collisions.
Third, your financial planner can be your personal financial coach. They should provide feedback and communicate with you regularly, holding an in-person meeting at least once per year. Someone closer to retirement or with a more complicated portfolio should meet with a planner even more regularly. In addition, a planner holds you accountable to your plan and potential. In emotional times, you need an unbiased sounding board to make sure you are being realistic and not just following the crowds.
Graduates head out into the world this month determined to follow their hearts, stay true to their values and blaze a successful path in life. By applying common graduation wisdom, you too can pursue your financial dreams -- no matter how dusty the diploma and mortarboard.
ING Retirement Coach Jacob Gold is a third generation financial adviser. He is a published author of "Financial Intelligence; Getting Back to Basics after an Economic Meltdown", which was published in August 2009. Gold is a CERTIFIED FINANCIAL PLANNER™ practitioner and FINRA Series 7, 24 and 66 securities registered.
Securities and Investment advisory services offered through ING Financial Partners, Member SIPC. Neither ING Financial Partners nor its representatives offer tax advice.