The Problem – Straight answers about personal financial planning and investment management are difficult to find
In this article, The Skilled Investor summarizes some of the significant problems faced by ordinary individuals, when they attempt to plan their family finances. This is the first in a series of articles that will provide scientifically grounded decision rules that address these problems. Sign up for an RSS feed in the right hand column to stay tuned.
Even if they are intent upon doing better with their personal financial planning, many people are confused and frustrated about how to approach personal finance and investment planning.
To rise above the confusion, you must have a durable and scientifically grounded understanding of personal financial planning and investment management.
Very often, people do not have access to disinterested and reasonably priced advice and information. Financial advisors are expensive, whether or not you pay them directly. No advisor can work without compensation. If you do not pay your advisor directly, then the industry will. When the industry pays your advisor, your best interests may quickly fly out the window.
Most competent financial advisors prefer to focus their attention on the wealthy who can more easily afford their services.
People of more modest means often receive inferior ‘free’ services. Many find that these free financial planning services quickly focus on the sale of expensive and often inappropriate financial products.
An endless stream of books and articles flows with contradictory recommendations on ways to ‘beat-the-market.’ The various financial media chatter on and on about daily minutia regarding one company after another, but they provide little useful synthesis.
On-line financial information rarely has enough depth to be very helpful. Free on-line tools provided to individuals tend to be simple and superficial one-size-fits-all calculators. They are designed primarily to funnel ‘retail’ sales prospects into a website purchasing process. These tools provide little real insight for individuals who are trying to decide what to do for the long-term.
When individual investors attempt to make sensible decisions about purchasing financial and investment products and services, the potential for confusion is astonishing.
Uncertainties about investment value and risk give rise to substantial ongoing securities price volatility and sometimes to extreme outcomes. Any consumer product characterized by such great uncertainty and such wide fluctuations in potential value must necessarily cause substantial buyer confusion.
Current securities prices reflect the market’s fluctuating auction consensus about potential asset values in an inherently unknowable future. Nobody really knows anything about what will actually happen to asset values in the future. Many individuals are so caught up in the pursuit of superior returns that they do not stop to think about the true auction nature of public securities markets. Instead of being trapped in continuing ego games of personal investment triumph, they should think far more about protecting their wallets. (See: How investment securities are valued — snapshots in time and The confusing investment securities market motion picture)
In many respects, the financial services industry is among the most competitive in the world. Yet, when it comes to delivering advantageous, cost-effective products for individual investors, let the buyer be extremely aware.
The vast spectrum of retail financial products and services ranges from excellent to abysmal. Asset price volatility and misinformation allow inferior products to flourish along with those that objectively are better.
The industry does not train its people to tell you what is best for you. It trains them to be persuasive and to sell to you what is profitable to them as quickly as possible. Most information provided by the financial industry is self-serving and is designed largely to ease this sales process.
Because realized investment portfolio values will be known only in the often very distant future, individual investors can hear both good and bad advice, and they may have no way to tell one from the other.
Unfortunately, investments do not have warranties. If your financial plan and your investment portfolio fall short in the future, all you will have is an empty wallet, when it may be far too late for you to recover.
Directly or through insinuation, the “we are superior” mantra of the financial services industry has been never-ending. Securities price volatility permits the false appearance of skill among industry practitioners, when most lack superior skills. Claims of superiority are based predominantly on the selective marketing of investment products that happened to have done better than average historically. Other products with inferior performance from the same organization are forgotten conveniently, or they are relegated to small print in a footnote. (See: How Morningstar Ratings for mutual funds are used as a marketing tool)
Because financial product quality is so highly variable, individuals simply cannot objectively determine which financial counselors are or are not expert and honest.
It is difficult to find another industry where ignorance, self-interest, and double-speak are so prevalent. Is it any wonder that millions of people are confused and frustrated about personal finance and investing? (See: Why only one Warren Buffett? — The illusion of superior professional investment manager performance)
As a result, many people are very distrustful of the financial industry. A 2002 U.S. public opinion survey of trust in various industries indicated that distrust of the financial services industry is deep and widespread. This Golin/Harris survey of 700 Americans found that the average industry had a -20% rating on an opinion scale of -100% to +100%. The “Brokerage/Wall Street” (-58%) and “Insurance” (-59%) industries ranked near the bottom of all industries in terms of public trust, with only the “Oil & Gas” (-63%) industry scoring lower. (See: How can individual investors trust, when so much information about investing is rubbish?)
With this rough and tumble world that you face when you try to do reasonable personal financial and investment planning, you are much better off with a well-considered viewpoint. A stable and scientifically grounded set of beliefs can keep you focused and on track throughout your life. It can help you to ignore all the rubbish that seems to come with this territory.
“The Solution – Only follow financial and investment strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient.” In a series of articles, The Skilled Investor will detail these strategies and discuss related rules for improving your personal financial practices. Sign up for an RSS feed in the right hand column to stay tuned.
Click here to learn more about Financial Planner Software
Personal Financial Planning
- American Funds – Capital Income Builder Fund – Class A Shares (CAIBX) attain a +4 Fund Authority Score (Fund Authority Scores rate mutual funds and exchange traded funds (ETFs) on the most important economic factors that influence individual investors' net long term diversified investment fund performance. The Skilled Investor developed the Fund Authority Score system to provide individual investors with concise and objective summaries of mutual funds and ETFs for comparisons within investment [...])
- American Funds – Capital World Growth and Income Fund – Class A Shares (CWGIX) warrant a +2 Fund Authority Score (Fund Authority Scores rate mutual funds and exchange traded funds (ETFs) on the most important economic factors that influence individual investors' net long term diversified investment fund performance. The Skilled Investor developed the Fund Authority Score system to provide individual investors with concise and objective summaries of mutual funds and ETFs for comparisons within investment [...])
- American Funds – EuroPacific Growth Fund – Class A Shares (AEPGX) get a +2 Fund Authority Score (The diversified investment fund strategy of American Funds' EuroPacific Growth Fund
According to American Funds' Annual Report for the EuroPacific Growth Fund, the fund "seeks long-term capital appreciation by investing primarily in the securities of companies based in Europe and the Pacific Basin." American Fund's 497 filing on the U.S. Securities and Exchange Commission EDGAR system [...])
- If Personal Finance is Difficult – Carefully Hire a Good Advisor (
If personal finance is difficult for you, carefully hire a good financial and investment adviser
A previous financial article, “The Solution - ONLY follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient,” suggested that investors are much better off with a well-considered financial plan. A stable set of [...])
- American Funds – Growth Fund of America – Class A Shares (AGTHX) collect a +2 Fund Authority Score (
The investment fund objective of American Funds' Growth Fund of America
With 4.4 million shareholder accounts, the Growth Fund of America (AGTHX) is the largest actively managed stock mutual fund in the United States. According to American Funds prospectus, the investment objective of the Growth Fund of America "is to provide you with growth of capital."
- Vanguard Total International Stock Index Fund (VGTSX) lands a +9 Fund Authority Score (The Vanguard Total International Stock Index mutual fund is a low cost alternative for broad, passive index investing internationally. This fund is a composite of three other Vanguard international funds: the Vanguard European Stock Index Fund (55.7%), the Vanguard Pacific Stock Index Fund (24.1%), and the Vanguard Emerging Markets Stock Index Fund (20.2%). The percentages [...])
- 2006 and 2007 Personal Income Tax Rates for the 50 States and DC (
2006 and 2007 personal income tax rates for the 50 states and D.C.
The Skilled Investor has made available for downloading a spreadsheet that contains graduated personal income tax rates and other personal income tax rate information for the 50 states and the District of Columbia.
If you want to know about specific U.S. state personal graduated [...])
- Vanguard Total Stock Market Index Fund (VTSMX) achieves a +9 Fund Authority Score (
The diversified investment fund strategy of the Vanguard Total Stock Market Index Fund
According to the Vanguard website, the investment strategy of the Vanguard Total Stock Market Index mutual fund is to use a "passive management—or indexing—investment approach designed to track the performance of the MSCI® US Broad Market Index, which represents 99.5% or more of [...])
- A Financial Decision Tool That Becomes Increasingly Valuable Over Time (As a financial decision tool, VeriPlan becomes increasingly valuable with the passage of time
Summary: While VeriPlan is an genuine bargain because of its low cost, it is an even greater bargain, when you consider that VeriPlan has no built-in obsolescence and that it can be used productively for years. We have engineered VeriPlan, so that [...])
- Set your personal savings and other financial goals – Step 2 of 10 Financial Planning Steps in the Right Direction (CLICK HERE TO READ THE SKILLED INVESTOR's OTHER ARTICLES ABOUT THESE "10 FINANCIAL PLANNING STEPS IN THE RIGHT DIRECTION."
The single most significant financial lever that individuals control directly is their management of personal expenditures. The second is their lifetime effort to obtain sufficient income. Most people simply do not save enough of their current income [...])
- When to Take Social Security Retirement Benefits (When to Take Social Security Retirement Benefits?
Concerning when to take Social Security retirement benefits, the Boston College Center for Retirement Research has some research in their publications section that addresses this subject. In particular, see "SHOULD WE RAISE SOCIAL SECURITY’S EARLIEST ELIGIBILITY AGE" by Alicia H. Munnell, Kevin B. Meme, Natalia A. Jivan, and Kevin [...])
- The Optimal Investment Strategy for Individual Investors (The Solution - ONLY follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient
A previous article, "The Problem - Straight answers about personal financial and investment planning are difficult to find," summarized important reasons why individuals may experience difficulties, even if they are intent upon doing better with [...])
- Allocate investments across the primary asset classes – Step 5 of 10 Financial Planning Steps in the Right Direction (CLICK HERE TO READ THE SKILLED INVESTOR's OTHER ARTICLES ABOUT THESE "10 FINANCIAL PLANNING STEPS IN THE RIGHT DIRECTION
Appropriately setting your personal investment asset allocation in line with your personal investment risk tolerance is a critical decision for every individual investor.
Because the average risk-averse investor holds the average portfolio asset allocation, this becomes the starting [...])
- Vanguard 500 Index Fund – VFINX – merits the Best +10 Fund Authority Score (The Standard & Poors 500 stock index is the most common equity index fund benchmark in the U.S. The S and P 500 tracks about 75% of publicly traded U.S. equity market asset value. The dominant issue in choosing among passively managed index mutual funds and ETF funds benchmarked against the S & P 500 [...])
- Set a Minimum Portfolio Size Threshold for Mutual Funds and ETFs (
Choose mutual funds and ETFs with a minimum economical portfolio size
If you are going to invest in actively managed funds, then you should want them to have a sufficiently large asset base to fund the necessary research.
If an active fund is too small, then fund management quality can suffer or fees could grow. Index funds [...])