December 21, 2002

Where Are You On The Economic Food Chain? Part 3
By Marcel Chartier

In part one, I outlined the six stages of financial growth and described the reasons why I feel most people glaze over when you start talking finances, the fact that most financial information is geared to people in the last three stages of financial development and most people are mostly the first three stages - hard to relate to information when it doesn’t seem to be pertinent to your situation, so bear that in mind as I focus on the last three stages in this part.

The stages:

1) securing a steady predictable income source that covers basic needs easily and allows for at least 10% investable income.

2) securing or ensuring the means to be able to secure permanent shelter (throughout life)

3) planning for (wage) income reduction or loss, disability or death - estate planning. Securing, ensuring loved ones are able to be cared for despite health or other problems that may occur.

4) establishing an ongoing plan and strategy for investment.

5) planning to reduce tax payments and maximizing income - wealth management and growth.

6) passing on the building blocks of a financial plan for beneficiaries.

As mentioned in Part two, the stages outlined are not strictly sequential, they just generally represent a emphasis as we move through our financial lives. For example, you may have begun to invest in your twenties once you landed that first decent job by buying some mutual funds through an employer plan, but investing wasn’t a big emphasis for you, you probably wanted a new car, or a condo - or that trip instead. So, as you move through the stages each one takes on a greater level of importance. Once, you have reached the third stage, the real “investment” stage of your life begins.

Stage four, five and six are somewhat intertwined, though five and six are more closely related.

Establishing an ongoing plan and strategy for investment is critical. There are basically two steps that need to be done at stage four, the first is establishing your risk tolerance, and second, devising a way to invest with regularity.

Establishing your risk tolerance: Ask yourself how much can you can stand to lose? Up to 10%, 30%, 50% of what you invest? I have learned the hard way, that it isn’t what you can stand to earn, but how much I keep when losses occur that matters most in an investment. Preserving capital is the most important part of investing for the early investor. In actuality, early stage investing is a sophisticated form of saving. You can’t make money without having money, so don’t put your early investment dollars into something that may evaporate: be boring with early investment monies. Whether you decide to buy your investments monthly/quarterly it doesn’t matter, just do it regularly.

Stage five, this is where you need to really have financial advice, so I am not going to tell you what you need to do - except to make sure you get financial advice. Why ? Simple, there are so many rules depending on jurisdiction, so many differences depending on your circumstances and jurisdiction regarding how to reduce taxes, or ways to keep more of your investment earnings, that is pointless to provide advice here. In addition, I want people at this stage to ensure they have a financial advisor to ensure that they are taking every step to manage their wealth in a manner that is appropriate to them at their current life stage. Only getting another opinion from a trusted source is the way to ensure that you are in a plan that can survive a bear market and benefit from a bull market. You have to be prepared for both, and most people aren’t able to do it all themselves. You also need to learn about investing and planning to determine what is best for you by being able to have real and meaningful conversations about your financial situation and needs by developing an vocabulary as to what terms are used in financial discussions.

Think of a car and car repair, you need to know how the car works enough to maintain it - the language in regards to cars, so that you can talk to the mechanic about it and not sound like a person who does not know the basics. Not knowing the basics just sets you up to be taken by the unscrupulous. You need to learn enough to know what your advisor(s) may be saying and what it means to have a meaningful dialogue with them, it also means you will be much less likely to be taken for a ride or given bad advice. If you get advice you wonder about, go someplace else and get a second opinion.

Stages four, five and six are partnership stages. You need to find an advisor or financial organization that may also be able to assist you when you need someone to do the financial re-adjustments and processes when you are too old or unable to do so. Establishing this relationship early is best done before you need it - very strategic.

Because these stages are partnership stages, financial companies/ advisors are always talking about what to do in regards to them. Why? They can make obscene amounts of money through this required partnering relationship. Any wonder most financial planning information is regarding the last three stages?