Knowing yourself financially. Knowing your “I”

As someone who is in the investment advisory arena for more years than I actually care to remember I am often asked, by clients and financial media alike, what investments would I recommend to potential investors. My answer is always the same – None! My reason for such a statement is that everybody is different by virtue of their family circumstances. Also, their need for capital and or income, their personal assets and liabilities. Finally, their own approach to dealing with risk is a factor too. Knowing yourself financially is the beginning of understanding these circumstances.

The key to making any investments lies not in putting one’s faith in a fund manager or a fund promoter. Rather, in understanding how someone should be handling their own finances, what goals in life they have for themselves and their family. Consequently, the focus then shifts to what money needs to be set aside for this future. Importantly, by identifying what investment return is needed a potential investor is then in a position to understand what level of risk has to be taken. 

What Financial planning is

In essence, Financial Planning is not actually about money, but about people or rather the fulfilment of their dreams by making them financially independent and causing these dreams to be fulfilled.

People’s dreams are unique to each individual. That is to say, with some people, it might be having enough money for retirement, for others it may also include funding for university and or secondary school fees, buying a holiday home or clearing down debt. Part of the approach to future funding and investment returns also needs to examine what an individual’s level of personal expense is and whether this is sustainable going forward into the future. Knowing yourself financially is imperative to answering these matters throughout life.

In other words, knowing what amount of monies are available then allows an individual who has an experienced investment adviser to project what a reasonable rate of return might actually generate at fixed dates in the future. Certainly, anybody invests in any investment project they actually should know all the basic facts about themselves. These are:

1. What is their net worth?

In short, what is the net value of assets after deducting all liabilities. For instance, a family home mortgage, investment mortgages, personal loans, credit cards and overdrafts?

2. What is their personal cashflow

likely to be in the coming year and up to five years from now?

3. Does the investor have emergency cash available

in the event of a personal crisis. For example, if an investor lost their job or their business suffered a major loss or closed up how many months cash would they have to hand to meet monthly family expenses. For instance, the basics of food, clothing and mortgage and not forgetting, in some cases, private school fees if that is also relevant.

4. How much income tax and capital gains tax are they likely to incur

That is to say, not only in the coming year but also into the future?

5. What way is the entirety of their investment portfolio set up

Importantly, not just the way that a particular or intended investment asset is arranged. But, what asset classes, economic sectors, currencies and countries are investment funds applied to? Are the assets in low, medium or high risk positions?

6. What level of liquidity exists within the investor’s holding

In summary, if they needed to move to another opportunity can they do so or are they either tied to a fixed term if already invested or likely to be tied to a fixed term if they needed to consider a new investment?

However, the question then that investors need to ask themselves is whether their funds are sufficient to meet the goals of themselves and their family. If yes, can the level of risk taking with investments be reduced with a proportionate reduction in returns? Is it the case that a greater level of investment return is needed with therefore a higher level of risk which needs to be taken?

In essence what is your “I” ? Is the rate of investment return that is needed to satisfy your personal goals? Investors need to understand themselves and their goals first as well as the effects of risk impacting on their lives. In conclusion, this needs to be done before they even choose financial instruments to apply their money to. Knowing yourself financially will help you understand your “I”.

Do you know your “I”?