The Road To Financial Empowerment: Part 3 - Growth
In our last two discussions we focused on Protection and Savings. Today, we will discuss the Growth Component of your personal financial model. To help you get started in looking at this important area of your financial decision making, consider these three key areas:
First, defining your investment strategy. There are many theories around developing an investment strategy. Your financial advisor should discuss with you their approach to see if it fits with your risk tolerance and preferences. Make sure you fully understand the approach and how it will work with your entire financial model. Does it coordinate with your protection elements? What impact will it have to your elements of savings? You want to feel comfortable with their strategic vision. If there is something you don’t understand, ask questions and set up regular communications to evaluate their performance. Most importantly, don’t make decisions in a vacuum. The Growth component is only one aspect of your financial model. Therefore, looking at your entire financial picture, which includes Protection, Savings, Growth, Cash Flow and Debt will put you in a better position to reach your financial potential.
Second, apply your strategy within all three phases of economic life. These include Accumulation, Distribution and Preservation. The Accumulation phase is when one begins to build wealth, accumulate it and store it for future use. The Distribution phase is when money is spent on wants, desires and needs such as education, a home and retirement. The Preservation phase exists when a person is trying to make money last through the retirement years, while planning for the ultimate transfer of wealth. All three phases should be reviewed and analyzed simultaneously throughout one’s lifetime in order to achieve effective results.
Third, understand the different types of risk. Regardless of the investment strategy you implement, you must make sure you are taking into consideration different types of risk. There are two basic types of risk: systematic risk, aka market risk, which influences a large number of assets and involves the uncertainty inherent to the entire market and unsystematic risk, aka specific risk, which affects a very small number of assets, but can be reduced through diversification. When working with risk, make sure you have an advisor that not only focuses on unsystematic risk, but also works to develop a strategy to mitigate or prepare for other types of risk such as political or legislative, taxation, interest rate, credit or default and liquidity risk. Keep in mind these types of risk may impact your entire financial model, not just Growth.
Focusing on only one area of risk or one phase of economic life may leave you exposed and vulnerable. By working with a Leap Professional, you can avoid serious wealth eroding factors and build an efficient and effective strategy that gives you control and enjoyment throughout your entire life.
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