EACH time I speak to potential clients of my practice about the financial planning process, I find myself explaining the importance of putting in place (dovetailing) initiatives that centre on their key life goals.
While those aspirations vary from person to person, what I have learnt is there is always a common denominator, namely that putting together a comprehensive financial plan encompasses smart moves to deal with the three fixed dimensions of financial planning. Those three dimensions are easily remembered by the pithy mnemonic PAD: Protection, Accumulation and Distribution.
Note 1: I've written extensively on all three dimensions — Wealth Protection, Wealth Accumulation and Wealth Distribution — because they are all important.
Intriguingly, though, whenever I conduct a financial planning or retirement planning workshop for the public, when I ask my audiences which of those three dimensions is most important to them, the overwhelming majority ALWAYS opts for the "A" in PAD: Accumulation.
Note 2: I've run my financial planning practice long enough to have a growing segment of second generation (or "next-gen") clients who are the adult children of some pre-retiree and retiree clients whom I've worked with for decades. Usually these next-gen clients first seek me out because their parents have said to them, "Ask Uncle Rajen if you have questions about money and investing."
Not surprisingly, I've discovered this younger set is just as focused on Wealth Accumulation, as opposed to Protection and Distribution, as their parents.
INVESTMENT SUCCESS
It is an integral part of the human condition to crave growth in general, and financial growth in particular. Unsurprisingly, these young adults approach me, first, to learn about the mechanics of investing. What ensues then is usually a long conversation.
After that, even if they ask me to construct an investment portfolio for them, I never allow them to invest right off the bat. Instead, I insist they save money first and keep doing so to show me a pattern of consistent saving.
I feel that is more important because long observation has taught me anyone can start investing on a one-off basis. But the way to raise the odds of investment success over a lifetime is to do so consistently, optimistically, and courageously first over many years or, later, over several decades.
Consistency is needed to ensure sufficient capital is built up over many years to make a positive contribution to the financial targets. Optimism is required because consistent hope in a better future helps the investor stay on target through thick and thin. And courage is essential because the world is a scary place and we need to be brave to stay the course through major market collapses.
Furthermore, the best way to ensure our Wealth Accumulation journey continues over the long haul is to avoid unwise investment-only portfolios and to focus on building long range and long-lived SIPs, or Savings and Investment Portfolios.
GROWING OUR MONEY
My preferred structure for a SIP for my clients (and myself) is what I refer to as the Metaphoric Portfolio Barbell. I often refer to it several times a day when conversing with current clients, potential clients, and various audiences. (Read about that mental model here: www.nst.com.my/lifestyle/sunday-vibes/2023/08/942297/money-thoughts-mone...)
Briefly, the two separate ends of the "barbell" comprise CG, or capital gains-focused savings, and investments, and PI, or passive income-focused savings and investments.
Taken together as a whole, the SIP morphs into the "shape" of a metaphoric barbell, thus providing us with both financial and emotional stability from our cash savings component, and the opportunity to try and grow some of our money faster than inflation and taxes erode its buying power using bona fide risk-on investments such as equities, investment real estate, and alternative investments such as commodities.
Additionally, I'm such a mega fan of stabilising cash as a core asset class that I urge my clients and students to have not one but two stacks of cash. The first forms the cushion or reserve account or EBF (emergency buffer fund), and the second the separate cash allocation within the SIP (our metaphoric barbell).
FINANCIAL FREEDOM 'TOMORROW'
But as much as I find that cash calms me down, a pure savings portfolio of only cash will not keep up with the eroding effects of inflation.
Usually, to — more or less — keep pace with inflation, bonds are used. And to then try and beat inflation, the equities, investment real estate, and alternative investment asset classes are included in the mix.
So, as you familiarise yourself with the concept of the barbell, always remember there is an intriguing temporal disconnect between the future-focused CG investments that will probably take years of volatile price changes to (hopefully) bear successful economic fruit, and the present-rooted PI instruments that provide us with ready cash in the form of interest, dividends, cash distributions (as opposed to reinvested distributions, which boost CG returns), and received (instead of paid out) rental.
There is a great deal for all of us to learn about investing. So, enjoy your journey from wherever you are today toward the happy state of financial freedom "tomorrow" as you intentionally and mindfully build your, hopefully oversized, SIP.
© 2024 Rajen Devadason
Rajen Devadason, CFP, is a securities commission-licensed Financial Planner, professional speaker and author. Read his free articles at www.FreeCoolArticles.com; he may be connected with on LinkedIn at www.linkedin.com/in/rajendevadason, or via rajen@RajenDevadason.com. You may also follow him on Twitter @Rajen Devadason and on YouTube (Rajen Devadason).