One of the ironies of America being an economic superpower is the lack of financial literacy. There are two broad reasons for this. First, our educational system never incorporated financial literacy into the curriculum. Second, the financial industry does not devote enough time or money towards educating the public about financial literacy. Consider the following statistics:
- 40% of adults give themselves a grade of C, D, or F in terms of their knowledge of personal finance.1
- 60% of adults have no budget.2
- More than a third of Americans pay only the minimum on their credit card each month.3
- The average American family’s credit card debt is $15,000, and they owe $33,000 in student loans.4
- Almost 70% of Americans are worried they won’t have enough to retire.
- Only six states require a complete personal finance course to graduate high school.5
It is important to understand that women are worse off when it comes to financial literacy. Despite the fact women are better educated, in the sense they earn more college degrees, than men, and are moving up in the corporate world, they still perform worse than men when it comes to financial literacy.6 One of the things I’ve always emphasized as a financial planner is that people need to become more educated about money. While there are numerous financial education books available, not many of them explore the causes of financial literacy or expand on the definition of financial literacy. One of the themes in my book, Redefining Financial Literacy, is that we need to understand the hidden forces that impact our financial decisions. This macro, big picture perspective explores how political and economic forces influence every aspect of your financial life.
Asset Management Advice
As the name implies, asset management refers to the management of investments offered by financial planners and other financial institutions such as investment banks and university endowments. The goal of asset management is to increase a client’s assets over time while managing risk. Asset management utilizes both fundamental and technical analysis. Asset managers may use fundamental analysis to study anything that can impact an asset’s value. For example, any economic or political news can have an impact on the value of a security or asset. Technical analysis, on the other hand, relies on previous price and volume. In other words, asset managers may look at historical date, along with mathematical patterns, known as technical indicators, to fine tune their investment entry and exit points.
At a fundamental level, asset management is about, “identifying a client’s goals and then working to accomplish those goals via portfolio management.”7 Asset management requires years of experience, which is why I always advice my clients to seek out the services of a qualified and experienced financial planner.
Investment Risk Management Strategies
Risk is one of those unavoidable things in investing. There are two broadly defined investor types. There are some investors who focus almost exclusively on returns and how fast they can grow their money. This type of investor is always finding ways to protect herself against the inevitability of a market correction or a bear market by using investment risk management strategies. For those who focus on risk, there are risk investment strategies that may be very helpful.
- One strategy to help you manage risk is to reevaluate your portfolio diversification and asset allocation. To further diversify, investors may want to think beyond stocks and bonds.8
- Another risk management strategy is known as rebalancing. The process of rebalancing is to keep a portfolio well-diversified. You see, over time, different assets have different returns or losses. This might mean that you let go of those investments that have appreciated in value while buying investments that are declining in value.
- Another risk investment strategy is to invest consistently. In other words, don’t over react if your investment is declining. If you are in this for the long-term, US Stock Markets can rise and decline over time so it’s important to understand your investment time horizon.
- You can also get an investment risk analysis. This is known as your risk profile. Investors are generally classified as aggressive, moderate, or conservative investors. You need to know which type of investor you are.
Retirement Plan Analysis
A retirement plan analysis is quite simply an examination of your current financial plan. It is designed to determine if you are on a path to realize your goals for retirement. Part of the retirement plan analysis is to check if you have a 401(k) plan and if your contributions are on track. Other areas of a retirement plan analysis include when you can comfortably retire, your Social Security benefits, investment strategy, as well as budget and savings.
A retirement plan analysis is correlated with how well you are currently prepared for retirement. Again, the earlier you start preparing for retirement, the more likely you will achieve your goal. If you are just starting out on your career, it is a good idea to establish a retirement savings account. This is what I call the accumulation phase, which is the time when you should contribute the maximum amount to your savings. You also need to reduce your debt as much as possible. Reducing debt becomes more important as you get closer to retirement. Lastly, you need to review your investment portfolio by making sure it is properly balanced with your risk tolerance and time horizon.9
Retirement Planning Advisor
One of the most important aspects of money management is the retirement planning advisor. In my other blogs, you may have noticed that I’ve always stressed the importance of consulting a retirement planning advisor. Now, it is important to remember that not all retirement planning advisors are the same. You need to find someone who is qualified and has many years of experience. You also need to look for an advisor who not only understands stocks and bonds, but also alternative investments.
It is important to remember that alternative Investments are speculative by nature and have various risks including possible lack of liquidity, lack of control, changes in business conditions and devaluation based on the investment, the economy and or regulatory changes. As a result, the values of alternative investments do fluctuate resulting in the value at sale being more or less than the original price paid if a liquid market for the securities is found. Alternative investments are not appropriate for all investors. No investment process is free of risk, no strategy or risk management technique can guarantee returns or eliminate risk in any market environment. There is no guarantee that this investment model/process will be profitable. Diversification does not guarantee profit nor is it guaranteed to prevent losses.
Financial Risk Management Strategies
Financial risk management strategies involve a process of assessing, managing, and mitigating losses. This process is used by large corporations as well as financial planners to potentially minimize risk. One very important feature of financial risk management is to reduce the degree of uncertainty in investment decisions. Fund managers for large institutional investors or university endowments quantify the potential for losses as a result of investment strategies. Financial risk management strategies are connected to the concept of return on investment. For example, the degree of risk for a U.S. T-bill is close to zero while the risk for emerging-market equities is very high. The goal, of course, for fund managers and financial planners is to minimize risk as much as possible.
You must remember that risk is intimately connected with return. In fact, “risk is inseparable from return. Every investment involves some degree of risk, which is considered close to zero in the case of a U.S. T-bill or very high for something such as emerging market equities or real estate in highly inflationary markets.”10 Risk management is the process of analyzing, accepting, and mitigating uncertainty in investment decisions.11
Book: Redefining Financial Literacy
One of the reasons I wrote my Amazon and Wall Street Journal best-selling book, Redefining Financial Literacy, was to shed light on the financial literacy problem in America. When you consider that only six states require high school students to take a standalone personal finance in order to graduate, you start to realize the magnitude of this problem. An additional 15 schools only require that financial coursework is integrated into another course.12 My point is that both the federal government and the states need to be a better job of preparing young people for the complex financial world. Another reason I wrote my book was to broaden our understanding of financial literacy. This is why I redefined financial literacy in terms of the hidden political and economic forces that impact your investment decisions. In addition to offering advice for retirement, I also revealed my mullti-asset class investment portfolio, known as the REALM model, which can potentially offer you robust returns while managing risk.
The REALM strategy contains Alternative Investments which are speculative by nature and have various risks including possible lack of liquidity, lack of control, changes in business conditions and devaluation based on the investment, the economy and or regulatory changes. As a result, the values of alternative investments do fluctuate resulting in the value at sale being more or less than the original price paid if a liquid market for the securities is found. Alternative investments are not appropriate for all investors. No investment process is free of risk, no strategy or risk management technique can guarantee returns or eliminate risk in any market environment. There is no guarantee that this investment model/process will be profitable. Diversification does not guarantee profit nor is it guaranteed to prevent losses.
1. Douglas P. McCormick, “Financial Literacy – The Big Problem No One is Talking About,” huffpost.com, June 3, 2017. https://www.huffpost.com/entry/financial-literacythe-big_b_10264622
5. Tim Ranzetta, “How Many States Require Students to Take a Personal Finance Course Before Graduating High School? Is it 6 or 21?” ngpf.org, February 12, 2020. https://www.ngpf.org/blog/advocacy/how-many-states-require-students-to-take-a-personal-finance-course-before-graduating-from-high-school-is-it-6-or-is-it-21/
6. Kim Elsesser, “There are More College-Educated Women than Men in the Workforce, but Women Still Lag Behind Men in Pay,” Forbes, July 2, 2019. https://www.forbes.com/sites/kimelsesser/2019/07/02/now-theres-more-college-educated-women-than-men-in-workforce-but-women-still-lag-behind-men-in-pay/?sh=1d924d0a4c31
7. Brian O’Connell and Benjamin Curry, “Asset Management: Get Expert Help to Manage Your Money,” Forbes, March 12, 2021. https://www.forbes.com/advisor/investing/what-is-asset-management/
8. SoFi Learn, “6 Investment Risk Management Strategies,” sofi.com, September 10, 2020. https://www.sofi.com/learn/content/investment-risk-management/
9. Joyce Streithorst, “What to Review when Conducting a Retirement Planning Financial Analysis,” frischfinancial.com, April 15, 2020. https://frischfinancial.com/what-to-review-when-conducting-a-retirement-planning-financial-analysis/
10. Will Kenton, “Risk Management in Finance,” Investopedia, March 1, 2021. https://www.investopedia.com/terms/r/riskmanagement.asp
12. Tim Ranzetta, “How Many States Require Students to Take a Personal Finance Course Before Graduating from High School? Is it 6 or is it 21?” ngpf.org, February 12, 2020. https://www.ngpf.org/blog/advocacy/how-many-states-require-students-to-take-a-personal-finance-course-before-graduating-from-high-school-is-it-6-or-is-it-21/