Financial Fitness: Personal Finance > Investments

The easiest guy to mock at the gym is the one with huge biceps, a large neck and tiny legs. We all know that guy; the guy who inspired the dire warning to not skip leg day. In terms of my personal fitness goals, this is my nightmare.

I consider myself to be a comprehensive financial planner, but some of my friends think I am that guy. Many of them see me as the “stock market guy” and are always ready to chirp at me with their latest stock picks or recent “naked call option” strategies. Sure, investing in stock and bond markets is a large part of what I do and I enjoy doing it, but as someone who is focused on being a well-rounded financial planner, I want to be sure that the people I help are happy in all aspects of their lives; not just their portfolio’s returns from last year.

Making Six-Figures and Going Broke

So how do we keep clients happy and financially fit? I’m fortunate enough to be at a firm that does business in a couple of ways. The majority of the business takes a traditional route where we manage assets and give financial advice for an annual fee. But our other business avenue allows for a much wider client base; hourly financial planning. Under this model, we charge for financial advice at an hourly rate; similar to a lawyer’s billable hours. This is where I’ve learned the most about people and their attitudes about their money.

For example, in the San Francisco Bay Area, it is not uncommon for a dual-income family to have pre-tax income of over $300,000. Where I’m from in Texas, this would be considered an above average income and would provide extra breathing room for a budget. But in this high cost-of-living area it is very common for that same family to be cash flow negative AKA “broke” at the end of month.

While not everyone shares the same money attitudes, a surprising number of people will blame their inability to save for their own future on their below-average investment returns. In reality, the real issue is self-discipline in their personal spending and savings habits. The point of frustration seems to (irrationally) be on their advisor’s lousy investment performance.

Again, investment planning is definitely in my job description, and I’m glad to give advice on anything that will help my clients make more money. However, if you make $300,000 a year and do not have any money at the end of the month, there might be larger issues to address besides stock performance. Money management would be all too simple if the solution was always to change advisors instead of change behaviors.

Being Financially Fit

Investments-only financial planning is the equivalent of walking into the gym, doing some heavy bicep curls, chugging a protein shake and telling people “yeah, I work out.”

Getting in-shape takes a lot of effort – cardio, weight lifting, a healthy diet, motivation, and much more. If you’d like to work out more but are lacking the education to be truly fit, perhaps it’s time to hire a personal trainer to get you in shape and coach you along the way.

When it comes to your money, a comprehensive financial planner is similar to a personal trainer – we help you shape up your financial life. A true financial planner should give you much more than a good investment portfolio. Your advisor should talk to you about the whole picture; from cash flow and savings patterns to college expenses for your kids and your relationship with family members. I even like to know how my client’s feel about their work-life balance.

Work for It

If you have $200,000 and hire me to make you a millionaire via record-setting investment returns, I’m sorry, but I can’t reasonably promise you that outcome and you will likely fire me. However, if we begin our relationship with $200,000 and you are willing to let me coach you until you’ve reached your ultimate goal, I’m happy to take that journey with you as your advisor and coach.

Time to hit the gym now; its leg day.

The Paradox of Risk

Risk is an inherent part of investing and goes hand-in-hand with return. Most investors need to take a certain degree of investment risk, and if they do not, they may be limiting their possibility of return. Theoretically, the greater the risk an investor takes, the greater the returns he or she demands for taking such a risk. However, this is not always true and not all types of risk are compensated by the potential for additional return. This is because risk is a relative term and there are several forms affecting different asset classes: purchasing power risk, reinvestment rate risk, market risk, and exchange rate risk to name a few. Additionally, risk differs depending on perspective and time horizon. For example, someone with liquidity and cash flow needs faces different risks than someone who does not need the money for thirty years.
 
Historically, stocks have been the only asset class that has reduced purchasing power risk; the effect of inflation on one’s portfolio. On the other hand, stocks can be very volatile in the short-term and these fluctuations are unpredictable.
 
Enter the Paradox of Risk 
 
How does one balance the short-term risk of investing in stocks with the long-term risk of not?
 
The short-term risk is volatility. The long-term risk is loss of purchasing power. To decrease the short-term risk it is helpful to avoid stocks, traditionally a volatile investment over short time periods. To decrease the long-term risk it is helpful to be in stocks, traditionally the only asset class that keeps up with inflation.
 
There are certain scenarios where this becomes especially tricky. For example, it is common practice to use 100 as a planning age, the estimated age of death, to ensure one does not run out of money. Where does this leave a 75 year old? He or she likely has liquidity and cash flow needs; however, their time horizon is now 25 years so inflation comes into play. To make matters more complicated, their parents likely went through the great depression and raised them to be wary of investing, or at the very least err on the side of caution. Combine this with the insecurity that comes with a lack of salary, assuming they are retired at this point, and one truly faces a challenge.
 
How much of this investor’s portfolio should be in stocks, keeping in mind the paradox of risk?
 
“It Depends”
 
While “it depends” is never a satisfying answer, I would venture that is what should be said here. A healthy amount of stocks, in the form of diversified low-cost mutual funds, could be appropriate, but if the volatility keeps the person up at night, compromises might have to be made. Furthermore, inflation is not something easily projected. A low inflation or even deflationary environment would drastically alter the approach towards purchasing power risk.

Trade-Offs
 
Financial planning is all about trade-offs: sacrificing something in order to gain something else. Typically, these trade-offs are across time in the form of delayed gratification. That is, giving up something today for something in the future. An investor often must stomach the day-to-day fluctuations of the stock market for the potential long-term returns. Point being, the paradox of risk is an important trade-off an advisor must consider when making allocation decisions for a client: while investing in stocks results in risk in the form of volatility in the short-term, not investing in stocks results in risk in the form of loss of purchasing power in the long-term.

An advisor must understand a client’s risk tolerance and risk capacity in order to address the trade-offs that results from the paradox of risk. In addition, managing expectations, specifically avoiding getting caught up in the day-to-day fluctuations, is key. As Josh Brown says, “volatility is not the enemy of the long-term investor. That investor’s response to volatility is.” In summary, while the short-term volatility of investing in stocks and the long-term risk of inflation are two sides of the same coin, the paradox of risk trade-off decision depends on the individual investor. 

Studying for the CFP® Exam: 12-week Crash Course

Full Disclosure

It took me 2 attempts to pass the CFP® Exam. And it was the most rewarding, emotional, grueling 6-7 months of my life.

The roller coaster that I went through was tough, but also worth it. What I learned after the first time is that I was studying wrong. To paint the picture, I was training for a sprint, when the 6-hour exam at 8:00am is actually a marathon. I had to learn how to train and prepare for the right race.

Below, I’ll share my 12-week, “crunch time” study guide that I used to conquer the CFP® Exam last year.

Let’s Begin

At the top, you should see the focus areas that you’ve probably seen a couple times before. I actually ripped these pie charts from my original CFP results. It wasn’t useful until I looked hard at it, and realized that I was studying inefficiently. It is is super useful:

Your Study Game Plan

Fundamentals + Retirement + Rules of Conduct = half of the exam. Think about that. If you get 100% of those, and then 50% of the rest of the exam, you can still pass. At least that’s how I viewed it.

If you’ve already made it through the material, all you have to do now is learn how to ‘take the test’. The only way to do that is to take (and bomb) practice quizzes – Everyday.

One of my best friends gave me some great advice about studying via practice questions: “you can only ask so many questions about 1 topic.” That means if you’ve seen all of the questions, there is no way that you can be stumped; no surprises.

I have to admit, I didn’t really read any material this time. That’s pretty much all I did last time - Dumb. It’s inefficient to just start reading the text. There’s too much, and they only test you on certain parts that they think are important. So the only way to better prepared for the test is to test yourself everyday – practice quizzes.

Every morning I created a 15-20 question practice quiz, tried really hard to get 100%, then ended up with like a 50%. It hurts the ego. But then you learn why you got the questions wrong and why you got the other ones right (b/c sometimes you guess and you can’t count on luck during the exam). 

Every week you should pick 1 subject, then take practice quizzes on them. Bomb the quizzes, bruise your ego, and then figure out why you did poorly.

Here’s the schedule I used:

1.       (1 week) Read (this is the only part I truly took time to read) the Practice Standards and Rules of Professional Conduct. I think it took me a few mornings to do so. Parts of this section are scattered across the entire exam.

2.       (2 Weeks) Quizzes on Fundamentals. It’s ¼ of the exam and it’s definitely worth two weeks of quizzing. The exam is big on education funding tools, basic economics, and TVM. For example: how much should Joe save each month if he wants to retire with X in 20 years, etc. I can’t stress enough that they love their own Process (6 steps). In a process question, the trick is to always find out which step you're currently in, so you'll know what step is coming next. Again, the CFP® loves to test on their own process.

3.       (2 Weeks) Quizzes on Retirement. I took a Retirement Planning class in college, and it was difficult because there are so many plans and unique rules for those plans. The most common question I saw was: Joe wants an employer plan. His company has X employees, they are mostly X years old, his goals for the plan are ___ and ___. What retirement plan should he have? It’s difficult because it requires a broad knowledge of every employer plan, and there seems to be a million. Also, you need to know if someone is able to contribute to an IRA if they are also contributing to an employer plan.

4.       (1 week) Quizzes on Investments. Not a heavy investments test in my opinion. Standard deviation and beta popped up a lot. Finding interest rates on a bond popped up a couple times. My advice is pretty limited in this section; cut me some slack, the exam was long.

5.       (1 week) Quizzes on tax. For some reason, CFP® loves NQSO, ISO, and RSU questions. Tax is tax, it kind of sucks.

6.       (1 week) Quizzes on Insurance. What can I say? Insurance is insurance. Taxes on Disability, LTC, and Life Insurance premiums/proceeds seem to be popular. But those might be more tax...

7.       (1 week) Quizzes on Estate. Any cheat sheet you may have for ownership/probate/gross estate is mega helpful. I got mine from the live review, you probably have one. Another heavily tested area is the difference between trusts – A, B, C trusts. Also know the differences between a living will, different power of attorneys, and health care directives.

8.       (1 week) Review again of Fundamentals + Ethics

9.       (1 week) Review again of Retirement

10.   Practice Exams. If you bomb, that’s okay. I think I scored 65% on one of the practice exams like a week before the exam. As you can imagine, I did not sleep very well that night. But the key is to learn why you missed those questions. Also, for the questions that you guessed on, learn why you guessed correctly. You don’t want to hope to get lucky on exam day.

Get Ready for Training

Study in the morning. Get your brain ready to be awake and ready during test time. For me, my brain was ready to go by 8:00 (my exam time). Get into a routine. You’re a grown up now, so adopt a big boy/girl sleeping schedule that enables you to be awake and mentally sharp by 6:00 or 7:00am.

The trick is to train your brain for this exam. It was the hardest thing I’d ever done; but now that I’ve done it, I have this new sense that tells me I can do anything.

Good luck.

Edit:  If you've made it this far in the article, odds are you are serious about this exam. When you're within 2 weeks away from the exam, be sure to read this post - it describes my last minute (non-technical) pieces of advice that are sure to take some of the edge off. Let me know in the comments what else you're wanting to learn more about. Happy testing!