A financial plan
Can be too customized if
It ignores clichés

Most people view the word “cliché” as a put down. As a guitarist, the last thing I want to hear is someone calling my music cliché. But financial clichés often represent sound and evergreen financial advice.

“Save 10% of what you take home:” 10% may not be the right number for everyone, but most people should be more intentional about saving money. 10% is better than 0%.

“Cash is king:” This cliché is less about cash and more about liquidity. The economy can fluctuate as capriciously and violently as the weather. Having the flexibility to move into and out of different instruments is a requirement for a certain percent of everyone’s portfolio.

A common case of people violating this cliché is real estate: people can become “house poor.” People sometimes sink too much of their financial resources into a home that is chewing up too much cash flow.

The principal invested in real estate can’t be accessed without either selling the real estate or leveraging it, i.e., taking out a loan against the property. Whether buying a home for your growing family or investing in high rise office space, the lack of liquidity in real estate is a risk that must be accounted for when considering an investment in this asset class.

“Don’t put all your eggs in one basket” never gets old. Diversification matters in nearly every corner of your financial life.

Part of your credit score is based on how many different types of debt you have managed. To avoid losing too much money in one investment, people diversify their holdings into companies representing sectors and industries that interact differently with the economy. If one investment is struggling, another may be thriving.

As someone grows wealthier, diversification may grow as well. What starts out as a portfolio of only stocks could eventually turn into stocks and residential real estate. Over time that portfolio turns into stocks, residential and commercial estate, then commodities, or private equity, or business ownership, or passive partnerships, etc.

“The rich get richer” and its corollary “the poor get poorer” are directly related to this phenomenon. As the wealthy spread their money into different assets – some of which may not be accessible to middle income investors due to regulatory constraints – they increase their chances of outsized gains. They also may find shelter from volatile stock market returns in investments that don’t correlate with the stock market.

“You have to spend money to make money” sums up business ownership. It also applies to tax planning in cases like Roth Conversions, where a short term tax bill might lead to lifetime tax benefits. It could also apply to strategic use of debt for purchases in real estate, advanced education, business upgrades, etc. It could also apply to taking on riskier investments with greater outperformance potential.

“Time is money” is just a stripped down explanation of compounding returns. It may be the King of Clichés.

It can feel limiting, unimaginative, and maybe even cliché (gasp!) to rely on old, simple ideas that have weathered the test of time. But the quest to find something tailored just for you, to take the road less traveled, comes with a warning label: “You’re On Your Own.”

If a planning strategy directly contradicts age-old wisdom, it deserves close scrutiny.

Over-committing to an illiquid investment, maxing out 401k contributions to the exclusion of other account types, tilting portfolio allocations heavily in a narrow category of investments. Any of these actions may be appropriate for someone, but that individual would need to have compelling reasons to break with tradition.

Every account and every instrument in your financial life should have a purpose. Whether it is adhering to traditional wisdom or not, it should have a clearly articulated “why” behind it. Knowing what something is for makes it harder to misuse.

If you want a better understanding of what you have and what it’s for, we’d love to talk with you.