Words of Wisdom

Things come, things fade away, and this column is no exception. As circumstances ebb and flow, I find that it’s time to move on. In the almost 60 columns that have appeared in this space in the past five years, we’ve discussed everything from the “spreads” that exist between different types of bonds to eldercare and health savings accounts.

As I reflect on all the columns I’ve written, I’d like to offer up several observations that can help guide you in your decision making and management of your financial affairs. Our financial health is varied and complex. There’s much to consider—investments, insurance, retirement, your children, your mindset, and your time frame, all of which are tied together by some common themes.

• Know yourself. One of the biggest challenges facing financial advisors is understanding their clients’ goals. We give short shrift to the concept of actually knowing our money values by using terms such as “risk tolerance” or “time horizon” to define our financial selves. But in the past several years, an entire branch of finance—behavioral finance—has grown up around the study of how investors respond to loss and risk, how they assess their own investment knowledge, and how that shapes their decision making. The way you think about money, retirement, and your children’s inheritance is complex and may differ significantly from that of your partner. Take time to better understand yourself, and you’ll make better decisions, and help your financial advisor effectively serve you.

• Pay attention. Things change. Your circumstances change. For example, your income may fluctuate. So it follows that your investments, your insurance, and the level of financial security you build into your life should change, too. You don’t drive a car without checking and changing the oil. The same should apply to your financial life. Demand an annual portfolio review with your advisor, and keep an eye on the performance of your investments.

• Read the fine print. The financial services industry is nothing if not creative, as it constantly conjures up new products with new bells and whistles. Some of those products aren’t all that great. Witness the trouble brought down upon the economy and the financial services industry by instruments such as collateralized debt obligations and auction rate securities. Don’t be lured into an investment by the promise of a fat return. Ask questions: What’s the risk? What are the fees? How does this investment work? If you don’t understand the answers, steer clear.

• Time is everything. Understand that investing and time are inextricably linked. If you’re going to need your money in a year, invest in something that will be there a year from now: a certificate of deposit or a U.S. Treasury note of that maturity. If you have more time, you have the ability to withstand a little more volatility, with the prospect of a greater return. That said, one of the biggest mistakes people make is to invest in something, such as the stock market, with too short a time frame. Then, when they need their money, the timing may not be right to sell.