Financial planning is a process that helps you figure out where you are financially today, where you want to be in the future and then helps you determine the best way to get there. The process begins with an initial in-depth review of your entire current financial situation followed by the creation of a blueprint on how to achieve future goals and objectives.
Comprehensive financial planning looks at a person’s overall financial situation in light of their goals, resources and objective. It involves the detailed review and analysis of all facets of your financial situation. This includes areas such as cash flow analysis, retirement planning, risk management, investment management, tax management and estate planning. It is only through a comprehensive analysis that your true financial condition can be determined and the proper plan can be recommended.
A financial plan is your road map to your financial future. Writing it down holds you accountable and will increase the likelihood of achieving your carefully analyzed and planned financial goals. Your financial goals may include planning for retirement, paying for college, supporting your aging parents and dealing with other financial challenges you may face in the future.
A fiduciary is generally defined as an individual or entity that:
- Acts on behalf of another person or persons to serve their best interest.
- Holds themselves to be an expert, by education and experience, in a particular field of study or specialty.
- Is obligated under the law to serve the best interest of their clients (beneficiaries) and to avoid conflicts of interest.
- No one is held to a higher standard of care under the law than a fiduciary.
Asset allocation refers to the diversity of your entire savings and investment portfolio across asset classes. Stocks, bonds, cash, and real estate, are examples of asset classes.
Diversification is a strategy that reduces portfolio risk by allocating investments across a range of assets in order to maximize returns while minimizing investment risk.
Risk tolerance is a measure of the degree of uncertainty that an investor is willing to accept with respect to his or her investment strategy. Your tolerance for risk will help design your diversification plan. If you favor higher risk, with hopes for higher gains, you may have more stocks in your portfolio. If you favor a more conservative approach, you may wish to carry more on the bond side.
Most people are familiar with mutual funds, as many have been exposed to them via their 401(k) plans. As its name implies, a mutual fund is a large portfolio of investments, managed by an investment professional or team that are mutually owned by all of the shareholders. Each investor owns shares. The investment professionals managing a mutual; fund select a mix of stocks, bonds, money market accounts and other options for the mutual fund and make buy-sell decisions on behalf of the shareholders based on the objective of that fund.
ETFs are passively managed investments that are traded on a stock market exchange. It is a type of security that combines the flexibility of stocks with the diversification of mutual funds. An ETF is designed to track as closely as possible the price of an index or a collection of underlying assets. When ETF’s were first introduced, they were passive investments. Today’s ETF’s are becoming more and more actively managed.
Socially responsible investing (SRI) is an investment strategy that gives the individual options to allocate capital towards companies whose practices align with their personal beliefs and values, and exclude companies that are not congruent with their social, moral, environmental, political, and/or religious beliefs.