9 Financial Planning Tips for Responsible Living

If you weren't born into riches, chances are that you've had to grow up and get a job to earn the money you need to survive.

Particularly if you've formed a family along the way, it's important to do what you can to protect the money you're earning, the money you're saving, and the people who have come to depend on you and your income.

Let's take a look at some basic financial planning tips that can help you better secure your finances and build a solid foundation for your family's future.

1. Build an Emergency Reserve Fund

The first and most basic step toward improving your financial situation also happens to be the one that is most frequently overlooked or, worse, dismissed - establish an emergency reserve fund. This doesn't have to be a monumental or complex account; an ordinary savings account at your local bank will work perfectly.

Your goal should be to accumulate a minimum of 3-6 months' worth of expenses in this account. You'll sleep a lot better at night knowing that, no matter what happens, you've got enough cash socked away to continue paying the bills and living in the same style to which you and your family have become accustomed.

Think of your emergency reserve fund as the foundation on which the rest of your investment endeavors will be built. You won't be using that money to begin investing in bigger and better, more complex vehicles, but the fund's existence is the cornerstone of a solid economic progression.

Plus, the dedication and discipline you will have to demonstrate in order to consistently set aside a portion of every paycheck will serve to condition your mindset for future opportunities and the rest of your financial planning journey.

2. Pay Yourself First

Still on the topic of establishing an emergency reserve fund, there is a right way and wrong way to do it, believe it or not. When considering the generic concept of saving money, most people make the mistake of taking the position that, "I'll save whatever money I have left over when I get my next paycheck."

The problem with that, and the reason those people never end up with any real savings, is that there's never any money left when the next paycheck arrives.

There is a reason why consumer spending accounts for 70% of GDP - prone to spending practically all of their income no matter how much money they make. A recent Bloomberg article reported that close to half of those making between $100,000 and $150,000 per year have less than $1,000 in their savings accounts.

If you're serious about saving money, whether it be to continue building your emergency reserve fund, growing a retirement nest egg, or planning for a large purchase, the key is to set that money aside as soon as you get paid. Your savings goal should be a top priority - nay, a requirement - that's no less important or mandatory than your mortgage payment, utility bills, car notes, and health insurance.

Treat it just like you do the rest of your monthly financial obligations and write out a check to pay the "bill" that is your savings goal. Even if the amount you set aside is small, over time those small deposits equal one big one. So, don't get caught in the trap of trying to justify skipping out on a payment to your emergency reserve fund just because the amount wouldn't be significant.

3. Protect Your Ability to Earn Income

Once you've fully funded your emergency reserve account with 3-6 months' worth of living expenses, your next step is to protect the most valuable asset you'll ever have: your own earning potential. The way to do this is with a disability insurance policy.

Disability insurance is one of the most undersold policy types - but, it shouldn't be. This is especially true for families with only one major breadwinner; if that person is temporarily unable to continue working, where will the money come from to pay the bills until he's back on his feet?

On average, adults who suffer temporarily disabling injuries are out of work 3-5 months. Not surprisingly, disability is responsible for more than 50% of all mortgage foreclosures, and 65% of the public admits to having no way to pay their bills if they were unable to work.

A disability insurance policy would replace your monthly income until you were well enough to return to work, or until you exhausted the benefits available to you based on the policy you purchased. These types of policies can become extremely confusing, and it is always better to enlist the assistance of a trustworthy licensed insurance broker to help you navigate the sea of possibilities and paperwork.

4. Protect Your Family's Way of Life

The next step on the road to financial security - now that you've established and funded an emergency reserve fund and protected yourself against disabling injuries - is insuring your family's ability to maintain their style of living. I'm talking about life insurance.

With a disability policy, your bills will get paid until you're well again. However, what if you weren't simply injured, but had been killed instead? In that unfortunate scenario, your disability insurance policy won't do any good to making sure your spouse and children have the money they need to continue paying the bills.

Now, we're not forgetting about your emergency reserve fund, because obviously your family could use that savings to keep the lights on. But, what happens when that money is gone? Do you know, or have you even considered, what might happen to your family - financially, I mean - if your income was no longer available to them?

It's probably the most depressing subject to talk about, or even think about, for that matter, but if there are people who rely on your income to maintain their style of living then you must figure this out.

Life insurance is a type of policy that will pay your family a pre-determined sum of money in the event of your death. Ideally, that sum should be large enough to cover your final expenses and also pay the lion's share of your household bills for several years. This would allow your spouse and children to remain in their home with enough of a financial cushion to figure out their own course of action without the added overwhelming stress of looming foreclosure or eviction.

Multiple types of life insurance policies exist, each with its own set of pros and cons. In many cases, more than one insurance policy is necessary to accomplish your goals. Some types of life insurance last forever, typically called Whole Life policies, and the others expire after a chosen number of years, and those are called Term Life Insurance policies.

There is no one-size-fits-all life insurance product, as your financial needs and those of your family are unique. Careful consideration and analysis will help you determine the best amount for a death benefit, as well as which specific type of policy is more suitable for your goals and budget.

5. Understand the Basics of Investing

After you've established a fully-funded emergency reserve fund and protected your family's ability to maintain their style of living, only then are you in a legitimate position to begin expanding into the investment arena.

Understanding the basics of how stock market investing works is essential, as the performance of almost every common investment vehicle (other than guaranteed fixed instruments, i.e., Treasury bonds and bank CDs) will be, at least to some degree, affected by or involved with the broader market.

Having a grasp of what affects the price of stocks, and how share prices translate to gains or losses in your investment account, should make future investment-related decisions easier and potentially more successful.

The best way to increase your understanding of how the stock market works, and how it impacts the value of your own portfolio, is to read. Plain and simple. Visit websites designed to educate consumers about stocks and bonds, dividends, mutual funds, and other investment vehicles. The SEC and FINRA, regulatory bodies dedicated to protecting investors and ensuring legislation is properly followed, are a valuable resource for education.

6. Consider Your Risk Tolerance and Time Horizon

Since every investor's situation and financial capabilities are different, what's appropriate for one person may not be appropriate for another. The two most important factors that must be considered when determining whether a particular investment option is suitable are risk tolerance and time horizon.

Risk tolerance is, simply put, your investment personality, or your threshold for market volatility. Some people are much more comfortable with the possibility that the value of their account might fluctuate, while others may be more risk-averse and not comfortable with large swings.

For this reason, financial advisors evaluate risk tolerance with specially-designed surveys and questionnaires that reveal a client's comfort zone, and those results play an essential role in selecting suitable investments.

Time horizon refers to the length of time until the money to be invested is most likely to be needed or withdrawn. For longer time horizons (e.g., several decades), more aggressive options are often appropriate because enough time remains for any sustained losses to be recovered.

On the flip side, shorter time horizons tend to limit suitable choices to more stable, conservative investments that have a smaller possibility of decreasing in value. The tradeoff, however, is that these conservative vehicles generate smaller returns.

7. Don't Put All Your Eggs in One Basket

One of the most basic financial planning tips for investors is to spread risk. This is called asset allocation, and it refers to the process of purchasing different investment vehicles across varied industries, as well as using multiple types of securities (e.g., stocks, bonds, CDs, real estate, etc.).

The idea behind asset allocation is that only a portion of your portfolio would suffer if one particular investment or industry declines, while the remainder of your account should be less affected.

Proper asset allocation requires complex knowledge and understanding of the connections between different asset classes and industries, as well as how each one influences the other. This is another area where it can be helpful for newer investors to have the assistance of an experienced advisor or financial planner.

8. Commit to Dollar Cost Averaging

Along with asset allocation, dollar cost averaging is a time-tested, effective technique to building a solid investment portfolio. Dollar cost averaging refers to the process of making regular contributions to your account, regardless of the current performance of the stock market. The idea is to avoid futile attempts to time the market and predict future price swings, and instead focus on amassing as many shares as possible for the lowest average price.

Since you're regularly contributing a fixed dollar amount, you'll end up buying fewer shares when the market is up and more shares when the market is down, thus reducing your overall average share price.

Dollar cost averaging is only effective as a long-term accumulation strategy and doesn't benefit short-term trading behavior. For retirement portfolios and dividend investors, dollar cost averaging can be a powerful technique. Many companies also offer dividend reinvestment plans (DRIPs) to make the accumulation of additional shares even easier.

9. Get As Much Free Money as Possible

If you're lucky enough to work for a company that offers employees a 401(k) retirement account (or Private Retirement Scheme - PRS in Malaysia), you should definitely consider signing up. Aside from the tax advantages that come from deferring a portion of your income, one of the biggest benefits to a 401(k) is free money.

The free money in a 401(k) comes from the employer's matching contributions. Keep in mind, though, that not all employers provide such contributions and those that do may have their own criteria or schedule to qualify.

A common example of an employer's matching 401(k) contribution criteria is sometimes referred to as the 50/6/3 rule. In this setup, eligible employees will receive a 50% match on 401(k) contributions up to 6% of their annual salary, meaning the company's maximum contribution will be 3%. So, with this arrangement, any eligible employees contributing less than 6% to the 401(k) are passing up an opportunity to get free money deposited into their employer-sponsored retirement plan.

Those free contributions into your retirement plan could end up making a world of difference years down the road when it comes time to actually use that money.

Closing Thoughts on Financial Planning

Financial planning helps us understand our goals in life and take responsible, practical steps to achieve them. There is no right or wrong way to begin financial planning, but the important thing is to start the process and implement effective investing habits .

Knowing what we want for ourselves and our families helps in all facets of life and makes it easier to identify the financial steps we need to take to realize our goals. Dividend investing can play a big role in letting our wealth work for us, but that is just one part of the overall equation. - Nasdaq

Diversification Can Counter Time and Chance

The following words are beginning to sound like a broken record but, based on the emails and phone calls I've received, it seems many investors have forgotten that the financial markets can and do move erratically, unpredictably and chaotically.

The past several weeks have served as a nasty reminder that investing is not an express elevator ride to the top floor. However, as you peer into the black abyss of what lies ahead, please keep in mind two key principles.

The first is that the performance of individual securities is uncertain and the second is that the performance of a portfolio of securities is uncertain in the short-term.

Although no amount of prose can counter the emotions resulting from a loquacious pundit discussing a day's tumultuous trading activity on Wall Street, I would like you to once again consider the wise words of Lucien O. Hooper, a Wall Street legend.

"What always impresses me," he wrote, "is that the relaxed investor is usually better informed and more understanding of essential values; he is patient, less emotional and avoids behaving like Cassius (brother-in-law to Brutus and a key assassin of Caesar) by 'thinking too much'."

Yet, investors' attention is too often shifted away from their main objective; the search for underpriced quality stocks. Instead, they focus on questionable opinions from so-called experts over what might or might not happen and when.

Of course, it is an arduous task to buy when everyone else is selling or has sold. It takes super-human resolve to invest when things look grim, to buy when many so-called experts are telling you that the investment outlook is uncertain at best.

But if you purchase the same securities as everyone else, then you will have the same results as everyone else. And chances are if you buy what everyone else is buying, you will do so only after it is already overpriced. Furthermore, you cannot outperform the market by buying the market, i.e., a market index.

Many investors live in fear of an investment not working out. Consider the following example. Invest $20,000 in each of five investments for 20 years. Assume the first investment is totally lost, the second investment returns only the original $20,000, the third returns 5 percent, the fourth 10 percent, and you hit a home run and receive 15 percent on the fifth $20,000 for an average of 6 percent.

If you do the math, you will find that after the 20 years, you will have a total of $534,946 for a compounded annual rate of return of 8.75 percent. However, if instead of splitting the $100,000 up into five parts, assume you could invest the entire amount in a $100,000 certificate of deposit paying 6 percent. What would you have at the end of twenty years? The answer is $320,713.

The key is not the 20 years but rather that not every investment has to work out. Diversification can overcome adversity if you remain flexible and open-minded.

Wall Street's world is fragile, and depends extensively on time and chance. So invest with intelligence, engage in solicitous but sensible discourse when considering the future, diversify your holdings and finally be skeptical about every prognostication you are given, including mine. Above all, recognize and heed the wisdom of Ecclesiastes' profound warning: "The race is not always to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favor to men of skill; but time and chance happeneth to them all." - heraldtribune

Wealthy Families Boost Private-equity Bets in Reach for Yield

Private equity had the biggest rise in asset class allocation in family office portfolios

Wealthy families are increasing their bets on private equity, focusing more on alternative investments after a difficult year for returns, according to a report from UBS Group AG and Campden Wealth.

Family offices are “absolutely clamoring” to do more co-investing in alternative investments, with 51% seeking to increase such holdings, the firms said in their annual Global Family Office report released earlier this week. Their allocation to private equity rose 2.3 percentage points in the past 12 months, the most of any asset class, the report shows.

The findings, based on a survey conducted from February to May of 242 global family offices, are a “road-map for financial advisers” as they engage in discussion with their high-net-worth clients, according to Joe Battaglia, executive director for the Americas region of global family offices at UBS. Wealthy families are favoring private equity in search of higher investment returns in a low interest-rate environment that's making it tougher to produce gains.

Family offices, which tend to have longer-term investment horizons, are “giving up liquidity for yield,” Mr. Battaglia said by phone. “I would expect that investing in private equity is a trend that we see continued into next year.”

They're using their own cash to buy stakes in privately held companies, as well as investing in private-equity funds managed by large firms such as Blackstone Group LP, according to Mr. Battaglia. Their investments may be locked up for years as they aim to make a profit through a sale or public offering of shares, trading liquidity for the potential of higher returns.

Last year proved a challenging year for investment performance. Global family offices that participated in the survey produced a meager return of 0.3% in 2015 based on a global composite of their portfolios, according to the report.

The average family office portfolio has 18% of its assets in developed-market equities, the largest allocation to any single asset class, the report shows. The next largest is direct investing in real estate at 15%, followed by an 11% exposure to direct venture capital and private-equity investing. The fourth-largest asset allocation is developed market bonds at 9%.

Family offices are chasing double-digit returns in private equity. They're expecting 12.5% gains from direct investments in venture capital and private-equity deals, 8.9% gains from investing in private-equity funds and 13.9% from co-investing in deals, the report shows. Co-investing in alternatives is appealing to wealthy families because of its relatively low cost while sharing the risk with other partners, according to the report.

Multi-year participants in the survey increased their overall exposure to alternative investments by 1.7 percentage points, driven by the rise in private equity allocation. Their holdings in hedge funds declined by 0.9 percentage point amid concerns participants in the survey had about poor performance and high fees, according to the report.

“Yield is difficult to obtain,” said Mr. Battaglia. “There's almost no yield out of government” debt, and family offices are placing less emphasis on corporate bonds, he said.

Family offices scaled back their fixed-income holdings in developed markets this year by 1.5 percentage points, after the asset class underperformed expectations, according to the report. In developed markets this year, they're expecting 2.6% returns from bonds.

There was a slight pullback of 0.1% in developed-market equities, with return expectations of 5% this year, the survey shows.

Participants in the global survey have an average $759 million of assets under management and the majority are single family offices, according to the report. - investmentnews

Alternative Assets Demand Attention

Investors and Advisors of all Sizes Attracted by New Opportunities in Alts

Over the last decade, alternative investments have become a mainstay for institutional and certain sophisticated ultra-high-net-worth investors (UHNWI) seeking greater diversification. Drawn to the fact that many alternatives tend to display little to no relationship to the price movements of traditional assets like stocks and bonds, many feel that allocating a portion of their portfolio to alternative assets is a prudent way to help improve a portfolio's overall risk/return profile. Others focus on the ability of certain alternatives, or alternative investment strategies, to hedge (or offset) any potentially adverse effects of large, unfavorable swings in the market. These are two aspects often given as the main reason investors are interested in alternative assets.

Over the same period, there has been a growing interest in alternatives among both financial advisors and their affluent or high-net-worth-investor (HNWI) clients. And, we should add, their interest stems from the very same characteristics that institutional investors recognized: diversification and potential downside protection. However, unlike most large institutions, advisors and individual investors still face significant hurdles that often prevent them from investing in alternatives.

Individuals often lack the same type of access to deals and educational information about investment opportunities as institutional investors. Whether it's the high minimum investment requirements that put alternative investments out of reach (even for HNWI and UHNWI), or a general lack of the resources and expertise needed to properly conduct due diligence on a given investment, for the average investor these hurdles are often too difficult or costly to overcome.

But this is on the cusp of changing.

In recent years, technology has been used to drive change into nearly every aspect of our daily lives. It is transforming how we use automobiles (think Uber combined with autonomous vehicles, for example), how we bank, navigate, date, and socialize. Some industries are adapting, while others are being displaced. Why should the alternative investment space be any different? Essentially the same approach can be applied. Use technology to streamline antiquated processes, drive down operational costs, and improve the client experience.

Demand for alternatives from the large and relatively untapped retail channel, combined with an investment industry that is still chiefly paper-based, with redundant and/or outdated processes (are you still faxing at your firm?), signals the exact type of opportunities that nimble, motivated technology-based companies have capitalized on in other sectors.

There are hundreds if not thousands of companies currently focused on using technology to improve not only how we invest in alternatives, but how every corner of the financial services industry operates. From online lenders, to robo-advisors, to the latest mobile banking or payment apps, financial technology (or Fintech) companies are working to revolutionize product structures, distribution models, and basic operational processes, all while keeping a laser-focus on improving client satisfaction. The alternatives industry is simply taking a page from the many other industries going through similar transformations.

Alternative investment platforms and portals have emerged as an innovative way to broaden access to the alt space, while opening the door to entirely new investment opportunities, like marketplace lending. The Fintech companies driving this evolution are, in a sense, creating the beginnings of a completely new, online marketplace by dealing with the challenges of access and education for investors looking to add alternatives to their portfolios.

The result―a democratization of alternatives―was helped in part by regulatory changes such as the JOBS Act (which, among other things, ended the ban on “general solicitation” for certain Regulation D securities). The financial crisis, which encompassed the “Great Recession,” uncertain and volatile financial markets as well as the “credit crunch,” also played an important role in setting the stage for this technology game changer.

But as with all democracies, new freedoms bring new responsibilities. So while investor desire for alternatives and a changing regulatory environment opened the door for Fintech companies to invent these online alternative-focused marketplaces, other players in the industry have had to evolve as well. For example, custodians are responding to the digitally driven world of alternatives by evolving how their services are delivered and how their clients' assets are accessed, documented and held. Any advances by the support players in the industry can only help speed and sustain its growth overall.

As investor interest and demand increases over the coming years—as many recent surveys and reports seem to indicate—financial technology firms and supporting financial service providers will continue to evolve best practices and develop state-of-the-art solutions. No one knows what the final version of this new marketplace will eventually look like. However, similar to the evolution of online trading, technology is likely to play an increasing role in helping to address the challenges that investors have historically faced when attempting to access and learn about alternative assets. - investmentnews

How to Choose An Asset Allocation Strategy That Matches Your Risk Appetite

The objective of a good asset allocation strategy is to develop an investment portfolio so that an individual achieves his financial objective with the degree of risk he is comfortable with.