Investment Plans Vs. Financial Plans

I want to start this investment series by making the important distinction that investment planning is not the same as financial planning. I'm going to use some very basic definitions here simply to seperate investment plans versus financial plans. This is simply to draw a distinction between the two. You can probably find better definitions elsewhere but mine will serve for the basis of my presentation. As we shall see going forward, I will mostly deal with investment planning.

First let's define financial planning which is the process of understanding & setting long term financial goals. This can involve the investment process but is largely a comprehensive review of many financial areas such as tax planning, asset allocation, retirement planning, and estate planning. Accountants, attorneys, insurance companies and financial planners are the professionals that are most associated with this process. In the interest of space I will simply call all of the professionals in this industry financial planners. The role of a financial planner is often to deal with various aspects of a client's financial picture. These can include but are not limited to a client's tax situation, estate planning concerns, funding future obligations such as college or retirement, insurance issues both personal and business, and perhaps overall lifestyle or investment goals. This type of planning is important for many individuals with higher net worth's, particularly as they progress through life and acquire assets.

Investment planning and the investment process is the development of an investment plan based on a client's investment objectives. Such a plan should take into account two extremely important factors:

1. How much risk a client is willing to take in a portfolio.

2. What is the long term growth rate that the client seeks on the assets.

Understanding these two variables enables the investment manager to develop an appropriate investment portfolio while at the same time helping the client to realistically gage appropriate investment results. Once you can gage these variables you can put in place an investment "playbook" for a client.

It has been my experience that in the people in the investment business are usually either very good at financial planning or the investment process but not both.

Peter Lynch for example knew stocks. You did not see him discussing the merits of various types of insurance.

Now most financial planners I'm sure will argue that the asset allocation process is the investment process and they are just as sophisticated at this as those who basically just do investments. I'm sure that there are many who can do an excellent job at both parts of the investment process (financial and investment process). Unfortunately many planners when they finally get to the investment process usually use a fire and forget process that often does not take into account for example where we are in the investment cycle and usually means investing money in the asset classes that are currently "hot". If you really want to witness this process in full then take a look at all the money that is flowing into foreign stocks this year. Now foreign equities may keep up their torrid pace for a while. I don't know when money shifts away from these into cheaper asset classes. But it is likely that when these assets inevitably correct that financial planners/ asset allocators are not going to be the first ones to recognize this.

Please understand that I am not trying to denigrate financial planners as I believe that many people need their services. But I think that each side of the profession has its own areas of expertise. You wouldn't want a heart surgeon taking out your appendix unless absolutely necessary in an emergency because they are too different disciplines. It is the same with your investments.

Next we will start on the investment plan by discussing risk.