New Financial Plan

One of the most important things to plan when working with your retirement investments is your asset allocation.  It’s also a funny thing, where people who swear all you want to do is match the market make their little tweaks hoping that they will beat the market.  One of my favorite pieces of financial advice floating around are the “lazy” portfolios, so that is what I will talk about here.

The idea of diversification is to spread out your risk, so that when one part of your investment goes down it does not necessarily mean all of them will.  Asset allocation is how much of your assets you spread between different investments.  Since I am focused on retirement accounts for this article I will choose to ignore your house, possessions, automobiles, etc.  Focus on money invested in accounts reserved for retirement.

The big basic choices are stocks, bonds, and cash type investments.  Of course there are other types of investments, and there are many segments in every type, but we’ll make another assumption that we want simple and we want to track the broad markets.  The next step, after defining what we are working with, is breaking down between the choices.  To keep it simple we put a large chunk in stocks, a small chunk in bonds, and an even smaller chunk in cash.  The idea is to match the broad markets.  As you approach retirement and move through it you shift assets from stocks to bonds and cash.  That is simple asset allocation.

Of course once that is said and done most people believe they should diversify further.  They pick market segments they believe will beat the market, or choose between value and growth, or invest in different international markets.  Those are all valid strategies.  The problem is the reason people choose those investments and the arguments they use against other strategies.  It’s funny that most of this strategy is done based on past performance and expected future performance, but always with the warning that none of that guarantees future results.  It’s funny that “matching the market” would generally mean investing in a total stock market fund and leaving it at that.  It’s funny that performance of a total stock market index, over the long term, are considered one of the the best standards and benchmarks.  I guess going forward that just might not be good enough for some people?

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I recently updated my “budget” sheet for 2007.  Yeah, I do budgeting a bit backwards.  Normal budgeting is a good idea if you need to know where your money will go ahead of time, if you want to limit certain spending over a fixed time period, or if you want to distribute money in a specific way over different categories.  Some people don’t like the idea of budget and feel better calling it a spending plan.  Names and descriptions aren’t that important to me.  I like to keep things simple and understand what I am doing and why.  I do not want to trick myself or anyone else by using gimmicks or cutesy names.

My “budget” sheet is part of a combination document tracking most of our finances.  The budget piece is broken down into spending categories that are totaled monthly.  Some expenses such as loan payments, utility bills, and food expenses are pretty consistent.  Other categories fluctuate throughout the year.  Other things tracked in the document are where money was spent, how things were paid, and what the end of month balances are.  The spending is broken down into types of stores, for example home & hardware is a category.  The payment methods tracks things like credit card use, bank use, ATM withdrawals, automatic payments, and checks.  The end of month balances are set up as a net worth type calculation so that all assets and liabilities are recorded each month to give an idea of our situation and progress.

When I started putting my finance tracking document together it was a lot more detailed in the budgeting section.  The problem was that with our attitude and discipline there wasn’t much value in doing the forward budgeting.  We were already watching our spending and making progress.  It was taking up too much time for the tiny bit of guidance it might be giving us.  In the beginning I was going in every week to update numbers and track our progress.  It started slipping to every other week, and then to the end of each month, but there was no drop off in our success even though I was putting less into it.  Next I began consolidating categories to make it simpler to add things up each month.

What I take out of what I do is understanding our spending.  We know what we bring in and what we spend.  Normally it doesn’t change much, so my quick checks are enough.  If something unexpected came up we go back to understand what happened and adjust to compensate for it if needed.

Do you think I’m missing something the way I do it?

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As I gather information for putting together a formal financial plan I am wary of the advice and pitches that seem to be everywhere.  I want information.  I want impartial information.  I don’t want to just make something happen, but want to understand what it is that I am doing and why I am doing it.  This article gets it right.  It’s good to read up on personal finance, to ask questions, and to pull in information.  Sometimes it is good to get advice or work with a “real” planner.  It is always, no matter what it is you are doing with your finances, good to stop and think before you act.

I am considering several financial moves where I need a bit more information and thought before I take action.  We are considering taking a home equity loan.  We are planning the timing of our retirement contributions and charitable donations for the year.  I have been watching Zecco to see if an account there makes sense.  I have new options in my retirement plan at work this year.  We are reviewing our insurance needs and might change our coverage this year.

All of these things take time, thought, and planning.  I have tons of information available on each of those.  I have crunched numbers, compared options, considered risks, and balanced tradeoffs.  That is the planner part of the decision.  Now we are looking at the family part.  We are reviewing our options and sleeping on them.  I am also a bit of a perfectionist, and by giving it a bit of time I might come up with some “better” ideas to consider.

I’m trying to do the same with this site.  I have information I could throw at the site.  I could dump postings up many times a day.  I could comment on all kinds of stuff I read, respond to other blogs, and spew opinions and advice.  Instead I will be taking my time and trying to make sense, to build up a bit of order, and keep information here reasonable.  I want to get a feel for how this will grow.  I want you to get a feel for how I present information.  Take some time with me.  Understand what is going on.  Use what you can, when you can, and hopefully we can all learn and get something out of this.

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It seems like timing the market, if you could really do it consistently, would be the single best way to grow rich.  If you follow most mainstream personal finance resources you hear that it is virtually impossible to make that work.  If you dabble in it and test your luck you most likely will find that they are right.  Many things I have done, however, have involved a bit of timing.  It hasn’t always worked perfectly.  It hasn’t made me rich (yet).  But I do believe it has worked in my favor.  Below are a few of my financial timing experiences.

Real estate and mortgage loans.  We bought our house early on.  Housing was moving up quickly in the area and we wanted to own.  It was a stretch for us at the time that we considered worth the small risk.  Within a few years of buying we had earned a few promotions at work and the housing market had kept rising.  Then mortgage rates moved lower, bounced a bit, and moved lower again.  We refinanced and cut our rate by 2%.  Now we have a decent house with a very affordable payment.  Our timing in both buying and refinancing worked out very well.

Timing the market.  Stocks have been volatile, hitting all kinds of highs and lows over the past several years.  I remember when I starting investing in IRAs.  People told me not to put any money in stocks because they were too risky.  That was short term thinking.  Down stocks have been good to me, and I have enough time ahead that they are very likely to do well.  We try to max out our contributions by the deadline, to dollar cost average by spreading contributions out.  I also try to beat the market by buying lower.

Not to say all of our moves worked out, for example the money in a real estate fund we own, I believe is about even with where I started while the stock market is up since then.  At the same time the emerging markets we picked up a few years ago have beat the market index.  By putting more money there we missed out on having a larger portion of our investments in that winning fund.

I guess In my mind this version of market timing is really just reallocation taken a little further.  Instead of picking an allocation and sticking to it, I adjust the allocation too.  Maybe it’s along the lines of shifting the allocation of stocks vs bonds as you approach retirement.  Maybe it’s like moving to fixed income investments after you have a sum that you want to live off and protect.  Do you think in either of those cases your situation determines what the market will do?  It doesn’t.  Is it the market determining what you will do?  Then you are timing the market.  No, in either case it is risk as the deciding factor.  Those moves are simply to reduce exposure to risky investments while protecting principal or cash flow.

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Every year I make loose resolutions.  I normally don’t include basic things like eating right, exercise, saving money, continuing my education and career advancement.  Those are all things that I work toward most of the time.  The resolutions are extra things I want to work towards.

This year a good chunk of my resolutions will be based on things I have been putting off.  I have to put a bit of effort in to clean these up and make them good goals with targets to track.  For now I have the start of a list as follows:

• Review all of our insurance needs and coverage.
• Finish shredding old paperwork and make sure what is left is still organized.
• College savings plan and action, probably signing up for a 529 and UPromise.
• Begin working on planning paperwork - possibly a will, power of attorney, estate outline, list of accounts and payment info, etc.
• Consider a home equity loan to consolidate other loans and make home improvements.
• Review retirement plans and progress.
• Set new financial goals.
• Complete my big financial plan, including all goals above and more.

I believe there are more things I have listed different places but have put off.  Getting on track with the big plan is a main goal, and keeping up with this site goes along with it.  Over the next week or so I hope to make a real list that is more specific, and hope to post it here and track my progress.

Are you making resolutions?  Are there any great personal finance type resolutions out there?

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One of the reasons I don’t have a full financial plan yet is because I never felt I needed one badly enough to invest the time or money into getting it together.  That doesn’t mean I skipped planning, nor does it mean that I am behind in any way (I hope that’s true).  What I do have are general rules and goals that guide me with my money.  This is something I will need to review and revise as I go along.  It is hard to boil this down into easy guidelines.  For now I will list the ones I can think of, the keys that got me to where I am at.

1. Understand what works for you and what level of detail you want.  Like I said, up until now I was happy without a full financial plan.  I had enough ideas to guide me.  I have micromanaged some areas but been somewhat hands off in others.  I weighed our options on things like retirement savings, insurance, homes, automobiles.  We figured out what we needed and what we wanted.  We balanced pros and cons.

2. Set rules or guidelines to keep you in the right direction.  One of the things we want is to be well prepared for retirement, so we plan on setting aside as much as we can early.  We also decided to be frugal in general.  We use reward credit cards and pay them off in full.  We keep emergency funds.

3. Follow your rules, be consistent.  We have maxed out our Roths the last several years.  We have done well with reward credit cards.  We have always had emergency funds, which have come in handy.

4. Recognize and understand the risks involved.  I know where our money is and generally what it is earning.  I know the terms of my mortgage, auto, and student loans.  I have considered the opportunity costs involved in deciding things like should I use savings to pay loans early, or should I get a home equity loan to consolidate other loans.  I need to learn more about the deductibles and replacement value calculations for our home and auto insurance.

5. Get help when you need it, or even when you think you might need it.  If you aren’t sure if you need help it can’t hurt to get a second opinion.  It’s better to get help than to make a big mistake.

6. Invest both time and money.  This works for most things.  It is good for your finances, yourself, your family, building relationships.  If there is something that will pay off for you, consider doing it.  It can be worth buying better clothes, taking classes, attending social events, joining clubs.

I’ll have to revisit this.  The wording might change as I come up with new items, or reorganize them into points.

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