Compare your finances to standards of excellence (Guiding Principle #2)
Compare your finances to standards of excellence and use them to make enhancements
When people with wealth describe to me how they view their current position, they use a wide variety of yardsticks to measure themselves. Some are troubled because they are comparing their finances to friends, family, or associates who appear to be much better off. Others are troubled because they have lost a large portion of their net worth through market declines, bad investments, or business setbacks.
It is more common, though, to meet people who feel quite confident and secure because they’re doing much better than they imagined they would when they were younger. Their confidence may be fueled by the good opinion of others around them, since wealthy, successful people are often accorded tremendous respect and kid-glove treatment.
There is nothing wrong with these benefits of success, but you can’t allow them to lull you into false assumptions about your financial position. If you want to know where you really stand in terms of financial strength, you need to employ objective standards of excellence.
What questions should I be asking about my finances?
Much of the research I’ve conducted over the past quarter century with my financial management company in Denver has been aimed at discerning the standards that top investors use to evaluate their position. How much liquidity should you maintain in bank accounts or other accessible holdings? What levels of semi-liquid and retirement assets need to be accumulated to maintain your standard of living? What attributes are most consistent with the best-performing portfolios? What attributes do the best balance sheets have in common?
There is a correct answer, or a narrow range of correct answers, for all of these questions and 100 others besides. Because of my personal duties as a fee-only, fiduciary† advisor, I’ve made it my business to determine best practices in all of these areas. As an investor, you do not need to duplicate this research, but you do need to make sure you are working with someone who uses standards of excellence, not guesstimates. And you need to use these standards to assess your own position and decisions objectively.
One group of essential standards involves the long-term durability of wealth. How do you know if your wealth is solid or rickety—susceptible to collapse in an acute or prolonged downturn? That brings me to my third guiding principle, which I will discuss in my next article.
†fiduciary: In a fiduciary relationship, one must act at all times for the sole benefit and interests of another, with loyalty to those interests.
Joseph J. Janiczek is the founder and CEO of Janiczek Wealth Management, one of Denver’s top financial management firms*. This article is adapted from his book, Investing from a Position of Strength.