How Your Financial Plan Should Drive Your Investment Allocation

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In the world of finance, there is a popular sentiment that aligns with the philosophy of the renowned investor, Warren Buffett: “Do not save what is left after spending, but spend what is left after saving.” This nugget of wisdom speaks to the importance of having a clear financial plan in place before making any investment decisions, especially considering the volatile nature of financial markets.

The need for a financial plan is echoed by Morgan Housel in his profound work, The Psychology of Money, where he underscores the significance of personal finance: “Personal finance is deeply personal, and one of the biggest mistakes we make is assuming it’s all about math.” Housel’s assertion reminds us that financial planning isn’t merely a numbers game; it also involves our inherent values and circumstances.

In this respect, Values-Based Financial Planning by Bill Bachrach emerges as a critical resource. Bachrach propagates the idea that your values should shape your financial plan: “Wealth is more than money. Don’t just plan your finances, plan your life.” This perspective is vital as it ties your financial plan to your life goals, and by extension, your investment allocation.

Investors often set “beating the market” as their goal, but this approach might not be the most suitable or relevant for all. Not only does it involve taking higher risks, but it also requires an extensive understanding of market trends and fluctuations, which most individual investors may not possess. More importantly, it ignores the unique financial needs and risk tolerance of the individual. A more relevant goal would be to focus on generating consistent returns that align with one’s financial objectives and risk tolerance, rather than trying to outperform the market.

Let’s take an example. Suppose your financial plan is centered around the value of financial security, with the aim to retire comfortably at 60. In such a case, your investment allocation might lean more towards low-risk investments such as bonds and blue-chip stocks. Conversely, if your values steer you towards wealth accumulation and you’re comfortable with risk, you might allocate a larger portion of your investments to high-growth sectors such as technology or renewable energy.

Therefore, your financial plan should serve as the cornerstone of your investment decisions. It should mirror your values, life goals, and risk tolerance. As Housel puts it, “Investing is not the study of finance. It’s the study of how people behave with money.” And how you behave with money should be dictated by a strategic and values-driven financial plan.

In summary, building a financial plan around your core values and life goals is the best way to guide your investment allocation. As Warren Buffet wisely said, “Price is what you pay. Value is what you get.” So, let your plan reflect your values, and let those values drive your investments.

Brannon Brown

Brannon is a financial advisor with LPL Financial and also serves as the team’s wealth manager. He joined Prosperion Financial Advisors in 2004. In addition to being a Certified Financial Planner® (CFP) and an Accredited Portfolio Management Advisor®, Brannon has a Master’s degree in Leadership from Denver Seminary. He is passionate about helping clients make wise, informed, investment and financial planning decisions. He is married to the love of his life, Melanie, and is the proud father of his son, William. When not working with clients or spending time with family, Brannon enjoys being in the outdoors of the Colorado high country, skiing, fly fishing, and exploring wild country.

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.