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The "Financial Planning Blueprint" Blog

  • Writer's pictureJason Flurry, CFP

How to supercharge the three most important pieces in your financial planning puzzle

...and why ignoring them causes most people fail financially.

Before I get into today’s article, let me take you way back from it. How many of you used to watch Popeye The Sailor Man? Yes, Popeye. You remember those old cartoons from the 1930s or maybe you remember seeing him in the funny papers back when people used to actually read the newspaper…

On the surface, Popeye was just an ordinary guy. He was a little quirky, rough around the edges, and certainly not anyone you’d think of as remarkable, like you would a real hero like Superman. But, oh man… If anything happened to his girl Olive Oyl, Popeye had this secret superpower he could use to jump into action. What was it?

Yes, you know. It was spinach.

And with just a single gulp of spinach, Popeye gained super powers that turned him and his trademark pipe into everything from a cutting torch to a jet engine. No one could stand against Popeye when he had his spinach and he would sometimes even eat the spinach through his pipe when in a jam, sometimes sucking in the can along with everything in it!

Popeye was fearless and his courage and bravery always won Olive back from Bluto. Can’t you just hear Olive saying now, “Oh, Popeye…”

Well, Popeye was strong to the finish because he ate his spinach, but what can you do to supercharge your financial plan so that you’ll be just as strong when it comes to protecting what’s important to you? I wish it was a simple as eating the right things, but really there’s much more to it. Fortunately, though, it’s not something that’s so difficult you can’t do it. In fact, I’m going to share with you three areas you can focus on that can give you the kind of boost you need to reach your goals. Here’s the first one.

Take an inventory I’m always surprised at how many people don’t know what they actually own in their investment portfolio. I’m even more surprised when people don’t understand how much risk they’re taking with their investments. It’s easy to get away with not knowing what you have and what your risks are when the markets are going up, but things don’t go so well when the market turns goes the other way.

It’s critical that you understand what you have, how much risks are involved, which types of risk you’re taking, and how your investment mix has performed over time, especially in the bad times. It’s very inefficient to have to recover from losses because it hurts your overall performance and significantly drags out your timelines when you’re trying to reach your financial goals. It can also create a lot of unnecessary stress that could be avoided by simply knowing what you have and how your recipe’s put together. By taking an inventory you discover where you really are.

Gain perspective The next area where you can gain a significant advantage is to compare that to where you really want to be or where you really should be based on your goals, your resources, and your timelines. This sounds easy, but it can be very difficult to do. There’s usually a battle between emotions and logic that cause people to wrestle with their own sense of fear and greed. We all do it and here’s how I normally see it when I’m reviewing someone’s financial situation.

Most of the time I find that people are taking too much risk and not getting enough return, which is usually do to having a poor allocation in their investment mix. They may have diversification, which means they have their eggs in different baskets, but they usually lack allocation, which means all of their baskets are on the same truck. If the truck ends up in the ditch, where there goes the whole thing. And it’s been so long since we’ve seen a vicious bear market like we had in 2000 when the tech bubble burst and again in 2008 during the global financial crisis, that people forget just how bad it actually was to see their life savings cut in half and less than 18 months.

One of the most common allocation mistakes that I see is what I would call the barbell or seesaw approach. It’s basically where someone has something very conservative on one end, like cash, CDs, or government bonds, and something very aggressive on the other end, like aggressive growth stocks or speculative real estate. They think one risk offsets the other, but it usually doesn’t work that way. Here’s why.

Think of a seesaw where you have one person on each end of a long board. If one person suddenly jumps or falls off the board, the person on the other end is in for a very unpleasant surprise. That’s what usually happens when someone takes a seesaw or barbell approach. What they thought would provide balance actually increases the level of imbalance when markets move, especially if they move a lot in a short period of time like they often do.

This is a “hit or miss” approach that carries a lot of risk with it, but there is a better way.

Think of that seesaw again but instead of having one person on each end of the board, now let’s put 10 people on the board spread out all the way across. If one person jumps or falls off the board now, we shouldn’t see the same shock and awe effect happen like we did when there was just two people on the board. There will still be some movement, but nothing that will cause the whole thing to come crashing down.

That’s how allocation works. When one thing zigs, ideally something else will zag to offset it. Also, having a good allocation give you a better chance to capture the upside for growth and still hedge the downside against risk. It’s like a recipe, so once you can envision what it is you want, you can build and follow a recipe that’s designed to help you get it.

One other mistake I see in this area is when someone gets too conservative with their allocation mix. Their fear, or their lack of knowledge, (or both) keeps them from investing in things that can protect their purchasing power against inflation. In their efforts to avoid market risk, they unknowingly take on purchasing power risk, which can be just as devastating to someone’s long-term financial well-being.

As you’re trying to gain perspective with your investments and with your own future, look at your goals, determine what rate of return you need to reach those goals, and design the best allocation with the lowest risk possible. Once you have that, then rebalance your percentages every 3 to 6 months to help keep you on track.

Rebalance with cash flow Finding a good recipe and following it is important, but over time you have to keep that recipe intact, which requires some ongoing management through rebalancing. Another way you can rebalance is with current savings, or cash flow. These are future contributions you set aside on a regular basis to help average your investment purchases over time. You may have heard the term “dollar cost averaging” and that’s what this is. It helps eliminate timing risk so you don’t always feel like you’re buying at the top of the market.

This is an important step, but even more important is the focus you place on your cash flow itself. Many people have way more cash flow than they realize, but money comes in and goes right back out to pay taxes, debts, and provide for the things that make up their lifestyle. Some money may be going to savings strategically already, but if you can look at what you have and what you have coming in, you can often rebalance things so that you pay off debt with existing resources and then (here’s the key) keep making the debt payment each month like before, but pay it to yourself.

That cash flow helps refill the bucket you used to pay off the debt and put you in a place where over time you can more or less bank on yourself instead of having to get permission to borrow money for purchases and life events, like college, weddings, vehicles, and dream vacations. Cash flow fixes a lot of things and adding it to your rebalanced investment mix can compound your growth faster than anything else. And here’s the best part. It doesn’t require you to “save extra” or change your lifestyle because it’s money you are already spending. You just weren’t living on it so it doesn’t feel like extra savings or burden in your budget.

How to supercharge your financial plan like Popeye If you want to have Popeye-like super strength, take a few minutes to determine where your savings are and where they really need to be in order to give you consistent growth with the right amount of risk. Then analyze your cash flow so that you begin to harness its power and reach your goals quicker. While this sounds so easy and simple, it will take a focused effort on your part to do well. That’s were having a coach, like a CERTIFIED FINANCIAL PLANNER™ professional, can help make common sense common practice in your life.

Planning for successful future is simple but the strategies and tactics aren’t simplistic. Take a look at where you are today and make a commitment to be more disciplined and more efficient with your financial future. It can be especially tough to make changes in your mindset if you’ve been successful in the past. But realize that you’re not as young as you used to be and that the last two major declines in the markets each took between 4-6 years to recover.

Do you have the time and resolve to do that again? And even if you do, why does it makes sense to needlessly suffer through that again when there is a better way?

Now is the time to reconsider your game plan and design a strategy that includes both diversification and allocation of specific percentages in a variety of categories within your savings and investment portfolio. It’s exactly what the wealthy do to build and preserve wealth, and you can supercharge your path to wealth by having your accounts independently reviewed by someone who understands how to help you reach your goals. Request a complimentary analysis of your financial game plan today. I promise it will be one of the most rewarding decisions you’ll ever make.


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