Investing Without Financial Plan and Goals

In times of plenty, we seek safe haven for surplus cash that will generate passive income for the future. In times of need, some of us take desperate steps to increase our money supply to meet the demands of the day. Both actions necessitate investment decisions, decisions that many of us are oftentimes not qualified nor experienced to make wisely without help. Thus, begs the need to know the answers to the four “wives” (why, when, where, who) and one “husband” (how) questions with respect to investing and financial planning. This article will discuss the two most important pre-requisites to making wise investments.

As a licenced financial planner and a business and financial advisor to small and medium companies, I am often asked to give investment tips or advice. Whether I am a fantastic investment guru or tipster or not is immaterial as I would always avoid answering such questions without knowing and understanding the financial background, status and financial goals of the questioner. This article is not intended to be a primer in investing or financial planning as one can select a book on the subject in any good high street or online bookstore. Rather, I would like to share what I consider to be the top two amongst the many pre-requisites an investor should consider before making an investment decision.

1. Have a Financial Plan with SMART goals

Planning in general is an activity we engage in all the time – planning for a holiday, planning for a wedding, or planning for any other event or planning to achieve a particular objective. However, how many of us really get involved in developing a truly comprehensive personal financial plan and implement the same? If not, why not?

The Certified Financial Planner Board of Standards, Inc (CFPBSI) defines financial planning as “the process of meeting your life goals through the proper management of your finances”. Life goals are goals dear to us that we would like see come to pass, especially during our lifetime. Such goals can be as simple as saving to buy a car or for a cruise around the world, or a bit more challenging in investing to mitigate the effects of inflation in planning for retirement.

In goal setting, it is imperative that we be rational and do not set goals that will be too difficult to achieve in the timeframe required else we can be truly discouraged and discard the plan altogether. Thus, it is good to follow the SMART principle, taught in Management 101, which states that our goals should be Specific (say, save to buy our particular dream car), Measurable (say, save $50,000 to buy a car), Achievable (say, plan to buy a car costing a sum we can afford), Realistic (as in planning to buy a car and not a trip to the moon although it can come true for some), and Timely (say, achievable within a reasonable time period).

Knowing our SMART financial goals will enable us to plan how to achieve them. If we are not sure how to develop a financial plan that is workable for us, we can seek the services of a financial planner. A point to note is to ensure that we consult a financial planner that is adequately qualified (say, having the CFPBSI’s Certified Financial Planner certification that is recognized worldwide) and experienced (and perhaps licenced to practice as a financial planner by the appropriate authorities to ensure accountability and ethical behavior).

2. Understand your personal financial risk profile

Prior to making any investment decisions, it is necessary that we understand ourselves in relation to our individual financial risk profile. All of us take risks in our daily lives and these could include crossing a busy street, or taking a flight somewhere, or even getting married considering the increasing number of separations/divorces. It is important to note that different people have different thresholds in the level of risk they are willing to take for any number of reasons.

Assuming a risk that we are not prepared or capable to cope with may result in adverse consequences and detrimental to our health. Similarly, the level of financial risk we are willing to assume or can tolerate should be carefully evaluated and such an exercise will normally be based on a set of criteria relevant to each individual. In addition, the risk profile of an individual can change as his or her personal status changes and it is generally accepted that a younger person can assume a higher financial risk compared to a person nearing retirement as the former has time to accumulate or recoup losses due to investment decisions not realizing their desired potential.

Thus, it is wise to understand our financial risk appetite and risk profile so that the investment decisions we make will commensurate with our risk profile. Investment opportunities abound in the marketplace for all risk profile types, whether one is considered a conservative or can take high risk.

In summary, the above are what I consider the two essential pre-requisites to investing and the others mainly pertain to details in understanding investing, investment strategies, and investment opportunities that can be found in any good investment text books or articles, advice from investment professionals or financial planners, or perhaps can be the subject of a follow-up article by this writer. A last piece of advice is to re-emphasise the fact that we should not make any investment decisions that can adversely impact our financial well-being until we have a sound financial plan, and if professional advice is required, do always consult a qualified and licenced financial planner to help develop one’s personal financial plan. Always remember this well-known adage – FAILING TO PLAN IS PLANNING TO FAIL.

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