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To Your
Wealth, Michael P. Haubrich, CFP Personal
Finance Rules for all Seasons (Part Two) |
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In last month’s column, I introduced two of my three personal finance rules.
Today’s column will cover the third rule – avoid making financial mistakes.
Let’s explore three types of strategic mistakes and list six tactical
mistakes to avoid. Avoid
strategic financial mistakes One important strategic mistake that
is avoidable is not choosing a financial advisor who is held to a fiduciary
standard. An advisor held to a fiduciary standard occupies a position of
special trust and confidence when working with a client. As a fiduciary, the
financial advisor is required to act with undivided loyalty to the client.
This includes disclosure of how the financial advisor is to be compensated and
any corresponding or potential conflicts of interest. Dealing with an advisor
who is not acting as a fiduciary creates an environment of doubt and
uncertainty as to the motives of the advisor. Is the advice in the client’s
best interest or the best interest of the advisor? Having an advisor looking
out for your best interest is the best way to avoid financial mistakes. Another
strategic mistake is investing without a written plan. The written investment plan is called an
“investment policy statement” (IPS).
It covers your investment objectives, time horizons and risk tolerance
along with constraints and the procedures for making portfolio changes. This document serves as a blueprint for how
your portfolio will be constructed and maintained. Its greatest value is realized when you are
tempted to make changes out of emotion rather than sticking to the process
laid out in the plan. We have referred
back to the IPS when a client wants to make a change that is not appropriate,
reminding them that we follow the plan, not the emotions of the moment. Without
having a written investment plan, it is easy to fall victim to emotion. This
means you could be susceptible to buying investments that are hot, (meaning
the price is high when you buy) and dumping them when they are out of favor
(selling when they are at depressed prices). Financial news is the fuel for
your activities as you become addicted to the emotional swings of the market.
Too often I see people without an investment plan investing too conservatively
or too risky – sometimes flipping from one extreme to the other as their
emotions drive the process. The third
strategic mistake to avoid is improperly managing risks. This includes not
transferring risk (by not maintaining adequate insurance coverage), not
assuming risks you should (by having low deductibles on your insurance and/or
buying unnecessary insurance such as extended warranty insurance) and
reducing risks (examples include proactively taking care of your health and
wearing seat belts). By not
managing risk, you may be assuming risks when you should be transferring that
risk to an insurance company. For example, you can easily afford to increase
your homeowner or auto insurance deductible from $250 to $500 (an extra $250
if you have a claim). But what you cannot afford is to only have personal
liability limits of $250,000 or even $500,000 and have a claim for $1
million. Yes, those claims do happen and you need to transfer that risk to an
insurance company. Have your advisor assist you in a complete review of your
risk management strategy. This should be done periodically, at least every
few years. Now for
the top six tactical mistakes to avoid.
To read a
copy of last month’s article on the first two personal finance rules for all
seasons, check out our web site at www.toyourwealth.com. Mike Haubrich is president of Financial Service Group, a
registered investment advisory firm in |