Are You “Diversifying” Your Financial Decisions?

One of my favorite things about being a financial advisor is the opportunity it affords me to hear different people’s money stories. Our experiences with money early on, and throughout our lives, play an important role in how we think about money today. It’s those experiences, along with our personalities, temperaments and idiosyncrasies, that cause some people to make more conservative financial decisions. That same wonderful mix of genetics, memories, and emotions causes others to want to make much more, shall we say, “adventurous” financial choices. And still other people fall somewhere in the middle.

On a scale of 1 to 10, with 1 being conservative and 10 being most adventurous, I’m probably a 6. I like to keep a good bit of cash in my emergency account and have plenty of disability and term life insurance, yet I own a small business and keep most of my portfolio in the stock market. Where are you on that scale? A 2? An 8? And how does that impact the financial decisions you make?

Recently, I’ve been thinking a lot about the art of making prudent financial decisions. Three weeks ago, I wrote about a framework that I believe can help us navigate that important process. In my blog, I pointed out that it’s perfectly fine, maybe even ideal, for different people to reach different conclusions about answers to financial questions that don’t have a “right” answer. If that’s true, then we all have a lot of latitude in deciding the direction we want to take with our financial choices. In one sense that creates a lot of freedom, giving us all the ability to make financial decisions that seem most appropriate for our specific situations. However, it also exposes us to the risk that, if left to our own devices, we’ll make too many decisions that lean towards our own tendencies, biases and fears. Doing so could expose us to risks and pitfalls that we hadn’t anticipated.

For example, in an effort to sleep better at night now, someone more prone to making conservative financial choices might decide to pay off their mortgage, keep a large amount of money in cash and invest the rest of their portfolio in low risk investments. Each of these decisions by themselves may well be prudent but what is the cumulative impact on that person’s ability to reach their long-term goals? Is it possible that their well-intended efforts to avoid debt and stock market risk could lead to a lack of liquidity and challenges in maintaining an inflation-adjusted income in retirement?

Conversely, someone with a more growth-oriented mindset might decide to keep a mortgage into retirement, invest mostly in stocks and keep very little cash in an emergency account. Again, these decisions may be perfectly fine individually but together could cause long-term damage to their wealth if they have to withdraw more money from their portfolio to make their mortgage payments at a time when their portfolio is down in value.

There are people who are able to consistently make conservative financial choices, just like there are those who can afford to almost always pick riskier options, without any impact to their goals. My point is that it’s important to understand yourself and remember that financial decisions aren’t made in a vacuum.  Each decision has an impact on our future and the cumulative impact of many decisions can be large. Plus, we may not realize their impact until it is too late. That’s why I believe it’s important that we make our financial decisions in the context of our other financial decisions. Just like diversifying our portfolio can help minimize risk while also giving us the potential to receive a reasonable rate of return, “diversifying” our financial decisions could help ensure that we honor our most pressing immediate wishes while also giving us the best chance of achieving our goals that may be a bit further out.

Perhaps one of the best ways to ensure that our financial decisions are addressing all of our short-and-long-term priorities is to look at them in the context of a financial plan. Another is to seek outside perspective when we’re faced with important financial choices. That’s part of why, at Beacon, we are so intent on offering real (financial) planning and meaningful advice (outside perspective.) What important financial decisions are you currently facing? Please let us know if we can help.

 

Geoff Hall, CFP®
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My wife, Crystal, and I have been married for nine years and have two kids, Cooper (7) and Rhodes (5.) When I’m not spending time with them you might find me downtown serving at our church, pushing my limits during a mountain bike ride or having coffee with a friend in the Five Points area. I've been practicing wealth management for 25 years and I'm thankful for the privilege of shepherding my family of clients through the ups and down of the markets and of life for that matter.