Introduction
All of us constantly strive to satisfy our needs and improve our economic welfare. According to Certified Financial Planner Board of Standards (2011), they define this as personal financial planning, which denotes the process of determining whether and how an individual can meet life goals through the proper management of financial resources. Thus, personal financial planning is both an organized process and attitude that considers improved lifestyle elements of an individual’s financial affairs and is focused at fulfilling his or her financial set-goals. This confronts everyone – including recent college graduates, professionals to senior corporate executives to develop a personal financial plan. Consequently, having the knowledge of what you need to accomplish financially and how you intend to do it, gives you an edge over someone who solely reacts to financial situations as they unfold.
Personal financial planning, which is so often neglected, can make a difference. The personal financial results we achieve are not a matter of luck – they depend on the efforts of the individual (Stewart, 2004). In the absence of personal financial planning, people’s financial positions during and particularly in the last quarter of their lives frequently are not as they would have hoped. Amling & Droms (1986) point out that financial independence does not necessarily suggest great wealth, but rather the individual has made optimum use of his or her income irrespective of the level of that income.
Investing in stocks is a great way of spending money wisely; however, determining which stocks to purchase is probably a major concern. Therefore, determining how much of your total savings and investments should be in stock should be the first step. For most people, how much they invest depends on how risk-averse they are. If you dislike any risk, then stocks should constitute a smaller proportion of your total savings and investments than lower-risk investments. Stocks continually rise and fall in price. One of the key fundamental to successfully investing in stock is to maintain a balanced portfolio of stocks. Over the past 65 years, common stocks have returned an average of 12 percent annually unlike preferred stock (Crumbley & Smith, 2002).
Preferred stock often is referred to as a hybrid security, because it is similar to bonds (debt) in some respects and similar to common stock in other respects – that is, the characteristics of preferred stock fall between debt and common stock. Like common stock, preferred stock is safer to use than debt, because a firm cannot be forced into bankruptcy if it misses preferred dividend payments. At the same time if the firm is highly successful, the common stockholders do not share that success with the preferred stockholders, because preferred dividends are fixed. In addition, preferred stockholders have a higher priority claim than the common stockholders.
On the other hand, we usually refer to Common stock as the “owners” of the firm, because investors in common stock have certain rights and privileges generally associated with property ownership. Common stockholders are entitled to any earnings that remain after interest payments are made to bondholders and dividends are paid to preferred stock, which are generally fixed-payment securities. Common stockholders do not have to share earnings that exceed the amounts that the firm is required to pay to these shareholders. As a result, common stockholders benefit when the firm performs well. On the other hand, the payments due to bondholders and preferred stockholders do not change when the company performs poorly. In this case, payment of “mandatory” fixed financial obligations might reduce the common stockholders’ equity. Thus, it is common stockholders who bear most of the risk associated with a firm’s operations (Brigham &Besley, 2011)
The key aspect of financial planning is to identify common return ratios and evaluating their usefulness. These common ratios include savings/income ratio, debt/income ratio, and savings rate/income ratio. Analysis of these financial ratios will involve looking into several factors, as the adequate ratio will be different for each client depending on the following factors; life cycle stage, wealth cycle stage, financial status of family, and state of economy.
When a person is young and in the accumulation stage, he will have more debt as assets will be built by taking loans. When a person reaches the transition or reaping stage his debts will be paid off and his asset base will also be large. Financial status is also a major consideration while evaluating ratios. A person may earn $500 a month; another may be earning $5000 per month. Occupation and income levels will determine their ratios.
A financial planner has to consider these factors while assessing financial statements. The state of economy is also considered while evaluating ratios. If the rate of inflation is low then even if the return is 9% per annum, the real return will be reasonable but in a high inflation phase a higher amount of return is required to beat inflation. If return is less than inflation then real return will be negative and there will be a decrease in the net worth instead of an increase, as shown by the return only (Gitman, Joehnk & Billingsley, 2010).
In any carefully developed financial plan, one should set aside a portion of current income for deferred, or future, spending. Placing these funds in various savings and investment vehicles allows you to generate a return on your funds until you need them.
In essence, financial planning helps you marshal and control your financial resources. It should allow you to improve your standard of living, to enjoy your money more by spending it wisely, and to accumulate wealth. By setting short and long term financial goals, you’ll enhance your quality of life both now and in the future. The ultimate result will be an increase in wealth.
Stock Analysis
My approach to selecting stocks to buy employs both technical analysis and fundamental analysis. My technical analysis filter is based on two models, which are called the value model and the growth model.
The value model derives from the ideas of Benjamin Graham, the reasoning on which this method rests is that, since we cannot hope to predict the future consistently, our best course is to seek out companies that have shown consistently sound results over a significant period and which can be purchased cheaply in the market. This idea that they should only be purchased when they are relatively cheap rests on Graham’s key investment idea, the margin of safety.
The growth model is probably best exemplified in the ideas of Philip Fisher ( ), the reasoning on which it rests is that there are some truly outstanding companies. The outstanding companies will do far better than the market will do on average. In order to achieve outstanding results, we should seek out these companies and concentrate our investments on them.
The way I use fundamental analysis is based on the method taught by Benjamin Graham and followed by his many acolytes, the most famous of whom is Warren Buffet. This is to try to invest in sound profit-making companies at prices that afford a margin of safety (Nicholson, 2011).
Conclusion
When you invest in stocks you must accept the fact that stocks do not promise the steady returns. Stocks provide high returns in some years and low or even negative returns in other years. Despite the volatility of returns, investing in stocks offers an opportunity accumulate substantial wealth. However, this comes with a wealth of informed decisions to take.
References
Amling, F. & Droms, W. (1986). Personal Financial Management. McGraw-Hill
Besley, S., Brigham, E. F. (2011). CFIN2 + Coursemate Printed Access Card. Cengage Learning
Boone, L. E. & Kurtz, D. L. (2010). Contemporary Business. John Wiley and Sons
Certified Financial Planner Board of Standards (March, 2012). Certified Financial Planner Board of Standards Inc. Retrieved from http://www.cfp.net/
Crumbley, D. L. & Smith, L. Murphy. (2002). Keys to Personal Financial Planning. Barron's Educational Series
Gitman, L. G., Joehnk, M. D. & Billingsley, R. S. (2010). Personal Financial Planning. Cengage Learning
Nicholson, C. (2011). Building Wealth in the Stock Market: A Proven Investment Plan for Finding the Best Stocks and Managing Risk. John Wiley and Sons
Swart, N. (2004) Personal Financial Management. Juta and Company Ltd
