The 3 M’s of Money Managment

The three M’s of Money Management – Measure, Manage, Monitor

Measure

There’s three different aspects of the term measure.

The first one is probably the most common you might think of, and that’s measuring your risk tolerance.

Most of this industry does that with just a standard suitability question that doesn’t dig down into what your true risk tolerance is. We like to get into a little deeper and talk about your personal benchmark. That is…
• What’s the average amount you want to make per year (rate of return)?
• What’s your uncle point? (what’s the most you want to lose in dollars, not just a percentage)
• What’s most important to you of the two? (hitting the rate of return or not taking the big losses?
• What’s kind of your timeframe? (how long to see these results)

The next part is to measure your risk capacity.

That is how much risk you can take without it altering your life.

For example, I have a client whose risk tolerance is high, they can take a lot of those ups and downs and not be phased. However, their risk capacity is not that high. They’re close to retirement so if they take a loss of 30% or 40% while they might feel like it’s okay because for lack or a better term, the have that gambling type personality, but a loss like that it would change their retirement income plan, especially if that loss came right before or early on in retirement.

Your risk capacity is how much you could lose without a dramatically impacting your retirement plan and your lifestyle.

The next thing we want to measure is the risk in your current portfolio, your portfolio risk.

You might get this nice statement with the pie chart in different colors, and you have a vague idea of what’s in your accounts, but what is the real risk and the real return potential.

Does your portfolio risk match your risk tolerance and your risk capacity?

Manage

Of course, money management should include managing, however, this term can be used in all variety of different ways.

If somebody is managing your account, whether it’s fund managers inside your retirement accounts, or you’re paying an advisor, the question becomes, how are they managing it?

Creating this colorful pie chart with different sectors, and then leaving be is not really managing nor do I believe that works today because our world is so fast paced, and things are moving, and things are changing and your portfolio should be managing accordingly.

So again, if someone is managing your portfolio, you want to know how they are managing it. I’m not saying you need to have a financial degree to understand what they’re saying, but if they can’t explain to you in a simple but complete way of how they are managing then are they really managing anything?

(For an example on what this looks like and how we manage, check out our March Power Hour with our money management team.)

Sometimes advisors are getting paid for no more that robo investing.

It’s also important to know the true costs, what you are really paying and what you are paying for, the service you are receiving.

I’ve heard people say they don’t pay anything for management, or they pay less than 1%, but when we dig into it, the fund fees or the hidden fees can be high, it’ll come back as 1 ½ or 2%.

What they’re doing for those fees?

Imagine paying for someone to care for your lawn, including all the mowing and trimming on a weekly basis, but all they did was cut it like a hay field, once every month or so. Would you be happy? Would you keep paying them? Many management fees are the cost of full lawn care but the service of a hay field.

Monitor

Monitor comes in multiple different shapes and forms.

If you’re paying somebody to manage your accounts, they should be monitoring not just your investments, but what is happening in the world and what’s happening in the markets -where’s there opportunities, that they should be taken advantage of and where are things that should be avoided. That’s part of their job.

My job as an advisor, I’m monitoring the keeping in line with the overall goals and personal benchmark of our clients.
It’s also your job to help monitor. If things are down, or if it’s uncomfortable, you want to go back and check how your accounts are being managed.

It could be that something new has changed for you. Maybe you’re closer to retirement or your risk level tolerance has changed, and your plan needs to be adjusted.

To recap, here’s how we use the three M’s of money management…

First measure, we measure your risk tolerance, your risk capacity, and portfolio risk to see if it matches your personal benchmark.

Then we manage to your personal benchmark and to protect your lifestyle.

Finally, we all monitor. The portfolios monitoring what’s happening and adjust accordingly, and I as an advisor, monitors to ensure all is coordinated and working and to make sure all of your financial goals are intact and working with you to monitoring any changes that come along.

The three M’s of money management, when done correctly guarantee you’ll have a much smoother financial ride and feel much more confident in your plan.

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