You Need a Financial Plan to Achieve Freedom

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Financial freedom can be yours. But you won’t just fall into it. You need a Financial Plan.

You can write one yourself or work with an advisor. Feel free to copy and modify mine if you like.

Here is my Investment Policy Statement (IPS) as an example.

 

FINANCIAL PLAN PURPOSE:

Investment policy statement and personal finance philosophy.
The purpose of investing is to preserve capital and to produce a reasonable return on investment.
These investments will provide a measure of financial freedom and financial independence. Financial independence supports recreational options, employment options, and financial integrity.

 

SPENDING PURPOSE:

Our preferred use for disposable income (other than investing) is to obtain education, travel, and uniquely memorable experiences. Money spent on consumer items or status-seeking is largely squandered.

 

RETIREMENT:

Complete retirement will never be the goal. But an unexpected forced early retirement should not be financially devastating.

 

ASSET ALLOCATION:

The asset allocation should include at least 3-5 loosely or non-correlated assets. Two of those will be bonds and stocks. Bonds produce stability and stocks produce growth over a long timeframe. Real estate, commodities, and private placements are also good options.

 

PASSIVE:

80-90% must be passive investments such as index mutual funds.
5% or less can be actively managed as a separate brokerage account. This can be more speculative. This helps me test investment ideas without excess risk. This trading account must consistently demonstrate excess risk-adjusted returns (beat the S&P500 index). Otherwise, it too should be passively managed.

 

COST:

Costs must be minimized. This includes fund expenses, trading fees, taxes, etc. Expense ratios should be comparable to those of broad-based low-cost passive index funds. Higher fees are justified only when there is proven risk-adjusted outperformance.

 

TIME HORIZON:

Investments should be for the long-term with an expected time horizon of at least 3-5 years.
I will invest approximately 38% of my gross income per year into long-term investments. This is done by the “pay yourself first” approach. Investments will be deducted from each paycheck.
We will maximize IRA annual contributions and convert them to Roth IRA.
We will maximize employer retirement plans (like 401K and 457b).

 

DEBT:

We will not go into debt for consumer items or depreciating assets or even for housing.
We will pay off credit card bills each and every month in their entirety.

 

HOUSING:

Homeownership is a blessing and a luxurious expense. We can afford that. We will keep in mind that a house is a liability (an expense that costs money), not an investment.

 

CASH:

We will maintain an emergency fund covering at least 6 months (preferably 9-18 months) in cash or a money market account. For example, $10k per month x 6 months would be $60k minimum balance. This will provide peace of mind and will also prevent us from needing to pilfer from our retirement funds, or selling stocks, in case of an emergency.

 

COLLEGE:

We will continue to invest at least $5k per year for 529 college savings. This optimizes our state’s tax credit.

 

INSURANCE:

We will continue all major medical, umbrella, homeowners, automobile, long-term disability, and term life insurance policies.

 

ASSET ALLOCATION:

The asset allocation for equities will run between 25% and 75%, averaging 50% (40-60%) depending on market levels/fundamentals and investor sentiment. A contrarian asset allocation is preferred. For example, lower stock allocation when the market is high and investing in stocks is a popular, enticing, glamorous thing to do. This will be achieved not through an attempt at prediction or market timing but rather through periodic rebalancing.

Acceptable options would be 40:40:20 or 1/3: 1/3: 1/3
Bonds 40%: Stocks 40%: Other 20%
Bonds 33%: Stocks 33%: Other 34%
Either result in a 50%: 50% (1 to 1 ratio) of stocks to bonds.

 

MONITORING:

All accounts will be reviewed quarterly. Rebalancing may be needed once per year. We would consider rebalancing based on the 5/25% rule. The asset allocations are changed only if they are off the target by either 5% from the target (absolute) or 25% from the target (relative).

 

PROFESSIONALS:

Although this IPS lays out a “do-it-yourself” approach, professional services are valuable. We will continue to consult financial and legal professionals when helpful. Costs of services will be scrutinized to compare with the value of guidance received. Those professionals may include CPA for taxes annually; Attorney for liability, asset protection, and estate planning; mutual fund managers; rental property managers; and a fee-only CFP for periodic assessments.

 

Now it is your turn. Dust off your financial plan. Or create one from scratch. What do you like or not like about my plan?

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7 Comments

  1. I assume your asset allocation is actually more prescriptive than what you have included? As in, 20% ABC, 20% DEF, 10% ETC etc….

    But you didn’t want to include that specificity in the blog?

    From what you have above, you can be 25% or 75% equites depending on if you think the market is high or not (which is clearly market timing!). Or did I misread that, and you are always 50/50 stocks and bonds, but the “other” can change. In that case, what is the other and does that have a market timing component?

    Thanks, nice to see what the master blogger is thinking behind the vail!
    FiPhysician recently posted…Callan Periodic Table in 2021: Two Decades in ReviewMy Profile

    January 27, 2021
    Reply
    • Thanks for stopping by, FiPhysician.

      You give me more credit than I deserve.
      You raise a lot of good points there. My writing and thinking aren’t as clear as I would like them to be.

      I read Ben Graham 35 years ago and I can’t irradicate it fully from my head. I tend to revert to his “value investor” way of thinking. The 25% to 75% sliding scale idea was from his Intelligent Investor book.

      I agree that for the most part “market timing” is a bad idea. But then I try to “value” the market, which is similar. I’m an irrational human. I tend to have a pretty stable asset allocation of around 40:40:20. When I feel the market is “overvalued” as I did in 1999 and again now, I tend to scale back my equities. I’m not saying that is desirable or prescriptive or even a good idea at all. But the guardrails are to tell me when to stop my own insanity.

      So as I look around at all the empty buildings on my street and talk to unemployed people I’m shocked by stock market highs right now. Prices seem higher than earnings support. Is there speculative craziness? I don’t know. But if I start to panic and decrease my equity holdings I would never let it go below 25%. It limits the damage I can do to my own portfolio.

      As far as what to invest in, I prefer low-cost broad stock and bond index funds. I allocate 30-40% of those stocks outside the U.S. I used to slice and dice into a dozen subtypes (small value, etc) but that added cost and complexity. And everything except my bonds went down in 2008. So now I just by the whole haystack rather than search for the needle.

      The “other” category means anything else I invest in. Currently, that includes 2 private companies, a medical office building, 2 surgery centers, 2 real estate funds, 2 rental houses, and a sliver of 4 apartment buildings. I might include in the future things like commodities, intellectual property, MLPs, preferred stocks, BTC, GLD, etc.

      Most physicians -myself included- would benefit from highering someone like you to give a more objective assessment and guidance.

      January 27, 2021
      Reply
  2. RIKKI R RACELA said:

    awesome post man. I’m not sure though that Ben Graham meant to keep moving between 25-75% stocks based on how you “feel” the market is valued, but rather on objectively sizing up and carefully measuring the value of each individual stock that was in your portfolio. Index funds didn’t really exist in his day. Do you think a target date fund would be best for you given it already has a sliding scale of stocks/bonds based on not only age but if stocks are truly overvalued compared to bonds? Might make your life easier and less worry, especially given your “other” category is pretty extensive!

    January 28, 2021
    Reply
    • Rikki,
      I’m glad you liked the IPS example.
      Yes, I think target retirement funds are a great option for most people. I’m not opposed to them at all. I tend to avoid them since I prefer a lower cost (closer to 4 basis points) and a fixed asset allocation rather than one that changes every few years. I’m fine with a low cost “balanced fund” with 60/40 or 50/50 to “set it and forget it.”

      Ben Graham actually did live to see index investing and he was a fan of it. I don’t really worry about any of my investments. I have lots of cash flow, minimal volatility, and minimal taxes on the income. My current IPS allowed me to easily exceed all of my financial goals and be FI in my forties.

      You may be right about Ben Graham being more objective than I indicated. He looked at price-to-book value and price-to-earnings for individual stocks. I still think he would find the current price per value ratios high though.
      He did talk a lot about the moods of “Mr. Market” and understood behavioral economics before it was widely studied. Mr. Market is subject to depressive episodes and mania that drove prices too high or too low compared to value.

      Here’s the quote from his Intelligent Investor book, ” …increasing the percentage in common stocks would be the appearance of the ‘bargain price’ levels created in a protracted bear market. Conversely, the sound procedure would call for reducing the common-stock component below 50% when in the judgement of the investor the market level has become dangerously high. …. it will restrain him from being drawn more and more heavily into common stocks as the market rises to more and more dangerous heights.”

      I see that quote as talking about value and behaviour. Many would now label him as simply a “market timer.” I think his measured approach is reasonable and is very different from a “market timer” who panicked and sold all their stocks in March of 2020. He wasn’t pretending to know when prices would go up or down but that didn’t prevent him from benefiting from differences between value and price.

      January 28, 2021
      Reply
  3. Crispy Doc said:

    We must be having mind-meld, WD. I was just referring a newbie finance enthusiast in my ED group to Sunny’s famously simple IPS on the Bogleheads Wiki as an example of a concise, well-conceived IPS. You’d never take a road trip without a destination in mind, yet so many of us enter our big paycheck years without knowing where the money will go or what it is intended to accomplish. Instructive post, well written and with clear intentions evident at every step.

    Fondly,

    CD

    February 20, 2021
    Reply
    • CD,
      Thanks for the comment.
      We had a WebEx yesterday to discuss physician finance. There were so many questions about whether real estate, bitcoin, oil stocks, bonds, etc are advisable.

      Almost every answer involves some variation of “Well, it depends on what your personal financial goals are…What does your plan say?”
      A lot of other decisions become clear after the basic plan is there.

      February 20, 2021
      Reply
  4. Brian said:

    As Stephen Covey says “Begin with the end in mind” this works for any goal, especially when it comes to your financial freedom goal.

    February 20, 2021
    Reply

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