Foundations of financial planning

¶ … financial planning as presented by a traditional resource, the newspaper Fort Worth Business Journal, and an Internet source from FinPlan.com.

There Internet resource is written to an audience that does not yet understand the basics of financial planning. FinPlan presents its concepts in easy-to-digest format (6 steps) that represent the basics of planning. The information is based on sound economic fundamentals, however, which belies the simplicity of its presentation. The steps are Means to Invest, Investment Time Horizon, Risk and Return, Investment Selection, Evaluate Performance and Adjust Your Portfolio.

The outline is fairly simple. The FinPlan site is based on modern portfolio theory but at no point attempts to explain MPT. This lends the outline a simplicity that is appropriate for the audience, but on a couple of occasions some important concepts are either overlooked or glossed over. For example, investment selection sets out very obvious criteria, but glosses over the fact that there are a wide range of instruments available. The concept of diversification is not introduced at all, despite it being a critical component of financial planning.

The six steps are in general more complicated than listed here. The article is little more than a springboard, but the manner in which it is written suggests that it is more authoritative than it actually is. I would not recommend that anybody base their financial planning strategy on the contents of this article for that reason. It is ultimately too simple to be useful but does not provide any guidance for further study. Given the Internet format, there is ample room for further links or more in-depth discussion, so this is disappointing.

The Fort Worth article focuses on more specifics. Whereas the FinPlan discusses time horizons, this article applies time horizons to specific meanings -- you must have a rationale for the time horizon chosen. This is sound advice -- the rational will allow the investor to avoid making knee-jerk decisions when the market goes down. The evaluation section is more pragmatic as well, outlining what to do and why it important.

Another strength of the Fort Worth article is that it considers after-tax details. This article outlines the topic of insurance and its role in the financial plan. The consideration of after tax returns is also important, because different investments offer different tax rates and these differences can be significant. Interestingly, the author here also does not touch upon diversification or indeed any other key tenets of modern portfolio theory. Risk aversion is not mentioned either, even though this is a key element in people's satisfaction with their investment performance. Another interesting and overlooked element is that of fees. All costs must be considered in financial planning, though it is understandable from the financial manager's perspective that discussion of cost be kept to a minimum. The main weakness of the Fort Worth article is that it focuses on only a handful of issues. The advice lacks focus, or synthesis.

Overall, both of these articles have strong elements, but are incomplete in scope. In both cases, the theoretical underpinnings of financial planning are not given much if any time. This can be taken as a strength in that the reader is likely to be turned off by such discussion, but it is also a weakness in that the theoretical information helps for better understanding. The issues presented in both of these articles are important to understand, but they are not at the core of building a strong investment portfolio. The approachability of these articles is admirable, but it comes at the expense of complete understanding of financial planning.