All people have different feelings and emotions towards money. Therefore, our investment decisions are unique and personal. What works for me is not necessarily good for you.
That is why a good financial advisor should focus first on getting to know you, knowing what is most important to you, what your objectives are, and your risk tolerance, before recommending a portfolio. Otherwise, it is very likely that what they recommend is not what you need. You have to flee like the plague from these people.
Now, there are some basic rules that are common to most people. For example:
You never have to chase returns. Of course they are important, but it is more important to control the risk. Many people forget about him and that’s why things go wrong for them.
You always have to have liquidity to face an emergency or an unforeseen event. All people must have a fund for it, which covers at least three months of spending. It is a reserve in short-term and highly liquid instruments, which protect as much as possible from inflation. There are many ways to achieve this: for example, a good daily liquidity fund, 28-day Cetes with staggered maturities, among other possibilities.
You should never think of a single instrument, but rather in terms of a portfolio. Any long-term portfolio (over 10 years) must contain a position in global stocks. Even the most risk-averse people (of course, the appropriate percentage will depend a lot on your tolerance for it). Remember: leading companies are the ones that move the world and a position in them is the only way to make your wealth grow in real terms.
Now, everything also depends on the stage of life in which you are. Because it is not the same to be starting your working life, than to be about to retire. A couple who is about to get married does not have the same needs as someone who has just finished paying off their mortgage.
Think of someone who is having their first child. Life will change radically and that includes the financial part. The little one will have needs such as clothing, vaccines, diapers, food such as formulas and that will imply reallocating family spending. But also, in the medium term he will start going to school and in the future, hopefully, to the university.
In many cases that changes priorities. There are parents who decide to take out insurance to guarantee their education, no matter what. Or create your own savings plan, complemented by life insurance (there are many ways to achieve this goal efficiently).
Sometimes there is an opportunity to buy an apartment and stop paying rent. That in many cases involves taking out a mortgage. Again our priorities and financial needs are modified.
But we also need to continue our retirement savings. Can we with all that? Will we have to decide what is more important? How does it impact our quality of life, both financially and emotionally?
It is clear then that at each stage of our lives our priorities change, new objectives arise and our needs change. That has a profound impact on managing our personal finances and on our investment decisions.
Each person is different and I reiterate that. But sometimes you have to talk about general cases that we can take as a basis and adapt to our particular situation. I will talk about that in the next installment.
