“Top 10” Financial Planning Checklist

This article is original content written by Manchester, CT Financial Advisor Thomas Scanlon, CFP®, CPA

#10 ball

For this post, we will review our Financial Planning Checklist. The following is our “Top 10” list of things you should consider as part of your financial planning process.

  1. Learn About Investing

    You likely will not really learn very much about investing that is actionable by watching CNBC all day. One bullish analyst appears after another touting their picks of company stocks. Why? Because the stocks they are publicizing are great stocks? Well, they may be great stocks, but do not assume they are just because an analyst says so.  These analysts are cheerleaders for these stocks, in part, so their employer can attain future business from the company they are currently plugging. Do you see a potential conflict of interest here?

    On the contrary, you can learn a tremendous amount about investing by reading books by or about Peter Lynch, Warren Buffet, Jeremy Siegel and Peter Bernstein. There is a huge difference between knowledge and information. A staggering amount of information is available to investors. Television, radio, magazines, newspapers and, of course, the Internet all bombard investors everyday with the latest news.  Knowledge, on the other hand, comes from understanding what you are trying to accomplish. Learning about investing will pay many more dividends that knowing the latest stock quotes on Yahoo! Finance.

  2. Save Money Every Month

    You have heard the old adage “pay yourself first.” There is nothing new here, just some real truth. Save money every month.  Then invest that money every month. Then:

    * Wash
    * Rinse, and
    * Repeat

    While everyone needs a Cash Reserve Fund, accumulating your money in a checking or savings account will not help you achieve your financial goals. Put your hard earned dollars to work for you by way of a disciplined plan of investing in stocks and bonds. You should also try to maximize your tax-deferred accounts.

    Employees should start with your 401(k) plan at work.  Contribute at least enough to get the employer match. Consider contributing the maximum annual amount of $22,500 in 2023, $30,000 for taxpayers over age 50. IRA’s are also an excellent tool for tax-deferred investing.  Also, don’t forget a potentially Tax-FREE Account, which is a Roth IRA.

  3. Calculate and Protect Your Net Worth

    Many years ago, Dr. Thomas Stanley attempted to quantify what your expected net worth should be in his book The Millionaire Next Door. His formula takes your age, multiplies it by ten percent (10%), and then multiplies again by your pretax annual household gross income. For this calculation, your gross income does not include investment income. For example, a 55-year-old earning $100,000 annually would calculate a net worth of approximately $550,000 (age 55 X 10% X $100,000 = $550,000). Once you have calculated your net worth, you should take steps to protect it.

    Make an appointment with an Estate Planning Attorney to get or update your:
    * Will
    * Power of Attorney
    * Health Care Proxy
    * Trust Agreement, if needed

    Review your Estate Planning documents every three years. Update them if necessary. The Federal Estate Tax Exemption in 2023 is $12.92 million per person. In 2026, however the Exemption will be cut in half and adjusted for inflation. In other words, absent any changes:

    A whole lot more folks will be subject to the Estate Tax.

    If you don’t like paying income taxes, well, as they say, “you haven’t seen anything yet.”  The Federal Estate Tax Rate is up to 40%.  If you are ‘fortunate’ to be a Connecticut Resident and you have a taxable estate, you get to pay an additional 12%.  Yikes!

  4. Don’t own too Many Stocks or Mutual Funds

    Many investors that hold individual stocks should be sufficiently diversified with at least 25-30 stocks. Many mutual fund investors should do just fine with 10-12 funds. Anything more than this can be overkill. The fewer investments you have, the easier it is to understand what you own. Peter Lynch, the former Manager of the Fidelity Magellan Fund said you should be able to explain in one minute why you own a particular stock. If you can’t do this, don’t own it. Simple.

  5. Avoid Margin Accounts, Options, Specific Stock Risk and Too Much Trading

    A Margin account is a specific type of brokerage account whereby the custodian of the account lends the investor cash and the account becomes the collateral.  There is interest due monthly on the outstanding loan balance.  Margin accounts are fine for so-called “professional traders.” For most other investors, it can be a great way to lose money quickly. The increase in interest rates beginning in 2022 has made this a much more expensive proposition.

    Avoid Options for the same reason as margin accounts. You can lose your money even faster!

    Specific Stock Risk is the risk associated with owning a particular security. This risk can be managed by owning a broadly diversified portfolio. Generally, you do not want to have any more than 4% of the portfolio in any one position.  Lastly, do not trade too much. Excessive trading can be bad for your net worth.   

  6. Don’t “Pick Your Flowers and Water Your Weeds”

    Far too many investors sell their stocks that are winners (picking their flowers) in order to “lock in the gain.” These same investors will hold stocks that are down (watering their weeds) thinking they will come back again soon and sell once they are even. Hello!  Sure, if you own a quality Blue Chip Company that is down in the dumps, for whatever reason, you may want to continue to hold this position.

    Do you really want to hold those tech stocks that have never made any money? In many cases, the answer is probably not. The key here is to know the fundamentals of the company. Water your flowers and pick your weeds!

  7. Play on the “Home Field” When Investing in Individual Stocks

    Why is it that some investors who work in the technology field invest exclusively in gold mining stocks? Or investors that work in the pharmaceutical industry “specialize” in technology stocks. And what about those bank executives that invest heavily in biotechnology issues.

    Does any of this make sense to you?

    It doesn’t to me either, but this seems to happen frequently.   You should use every (legal) advantage you have when investing.  If you work in technology, why not invest a little more in technology? You probably know more about the strengths and weaknesses of Apple (APPL) and Amazon (AMZN) than those so-called Wall Street analysts. This is not to suggest that tech employees should avoid all of the other industries and just invest in technology stocks. Far from it. It’s just to say that if you’re going to invest in individual stocks, play on the “home field” and focus on areas where you likely have an advantage. 

  8. Don’t Follow The Herd

    Investors have a tendency to follow the herd. Don’t do that. Find your own grass to graze on. The most recent examples are the Technology Sector, Crypto and SPAC’s. If you want to read a great book about the past crazes, check out Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay.  Talk about irrational exuberance!

  9. Get Help

    Can you manage your own personal financial affairs? Perhaps you can.  Will you accomplish what you need to do?  Again, perhaps.  Or, as we say quite a bit, ‘we’ll see.’ Do you really have the time and energy to handle everything that needs to be done? Not likely.

  10. Be Patient

    Easier said than done, right?   In today’s instant gratification, got to have it all now world, patience is, well sorely lacking.

    If you are in your 20’s or 30’s you have a very long runway before you get near retirement. Invest accordingly. Someone in their 50’s or 60’s has a much shorter runway.  Having said that, it’s possible some of these folks may live another 30 years.  That’s a long time! That’s why you will need to continue to maintain some equity exposure even in retirement. Stocks clearly provide one of the best hedges against inflation.

Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.