For many chiropractors, money is a major source of stress and anxiety. Regardless of income, you may sometimes feel as though your money controls you, instead of the other way around. The good news is, you may not necessarily need more money: You might just need a better money-management strategy.
The first step is to create an overall plan in order to understand how much you currently spend. Think of financial planning as a trial strategy, charting the path that yields the highest likelihood of achieving success with the least amount of resistance. Personal financial planning helps you manage your resources so you can reach your financial destination.
Financial planning is used to give you a clear picture, and the planning process forces you to assess your current situation so you can determine if changes to your money-management strategies are necessary.
Financial planning also provides direction and discipline. Without a concrete financial strategy, you are more likely to make impulsive decisions when you buy insurance, invest in the hot stock of the day, or adopt the latest tax-saving strategy. While well-intentioned, your efforts may lead to acquiring parts of a financial puzzle that don’t fit well together, and may actually conflict with each other.
A good financial plan should help you integrate your assets with your goals and objectives. You need to prioritize your objectives, then establish asset management strategies to accomplish the most important goals first. Uncertainty about finances creates anxiety, but going through the financial planning process will help give you peace of mind.
Once you have an overall financial plan in place, it becomes essential to determine which investment strategy will give you the highest likelihood of reaching your goals with the least amount of risk. You probably already know it is imperative to properly diversify your investment portfolio; using a mix of stocks, bonds and cash can dramatically reduce the risks associated with ever-changing interest rates, erosion of purchasing power, and market fluctuation.
The difficulty arises in calculating how much of each asset you should include in your portfolio. The answer can be found in a step-by-step walk through the asset allocation process.
Asset allocation is the process by which you establish what percentage of your financial portfolio to devote to each of the varying asset classes. The emphasis should be on long-term market trends and not short-term market volatility.
Your asset allocation choice may be the most important decision you make when it comes to your financial future. According to an influential Brinson Partners study published in the Financial Analysts Journal, the asset allocation decision may account for as much as 94% of overall investment performance. By contrast, the selection of individual securities within each asset class accounts for just 4% of return, and market timing contributes only 2% to the total return on investments.
In order to choose the best possible asset allocation mix, you need to know your specific needs. The goal of any asset allocation strategy is to match investment needs with the investment categories that offer the potential for maximum returns with a minimum amount of risk. The underlying premise is that all asset classes go through cycles, and the losses in one will be offset by gains in another.
In order to determine your optimal asset allocation, you need to consider the following factors:
- Return needs: To what extent is income generation a concern? Capital preservation? Growth of principal? Since your life is continually changing, you will need to frequently review your allocation strategy and make adjustments.
- Risk tolerance: Are you a “nervous Nellie,” or a high-rolling risk taker? Are you comfortable with the daily fluctuations of the equity markets, or is a guaranteed certificate of deposit more your speed? How much risk is involved to increase your chances of reaching your financial goals? Your portfolio must allow you to make money while also allowing you to sleep at night.
- Time frame: How old are you? How long do you have until retirement? How long have you been making money to invest? The amount of time you have to reach your objective is critical. A diversified stock portfolio is a superb long-term investment for most situations; however, the less time you have, the more conservative you should be.
- Tax status: Are you married? Single? Do you own a house? What are your current and projected tax brackets? These kinds of factors can have an influence on the type of securities you choose to invest in, such as taxable or tax-free bonds.
- Liquidity needs: Are you likely to need cash fast? Can you afford to live comfortably after making your investments? You need to know what your emergency fund requirements are and structure your portfolio accordingly.
- Changing needs: Remember, the asset allocation process cannot remove all the risks from your portfolio — it can only reduce them. The asset allocation process is dynamic and needs to be constantly rebalanced in order to reflect changes in the current economic environment and your situation.
A qualified investment advisor can help you design and implement a beneficial financial plan specific to your situation. With a solid financial plan in place, you can achieve true wealth the old-fashioned way — through wise decisions and sound investments.