Ask, “What’s the trade-off?” not “What’s the trade?”

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Many financial media outlets, particularly at the start of the year, focus on what they think the next trade is.  Should you buy Exxon or IBM or Apple? Or just stick with the S&P 500 Index? Maybe small tech companies? Chinese stocks? Russian bonds?

You will likely read that these investments may be undervalued, overvalued, due for a good year, or going to benefit if oil goes up or down.  Opinions abound, no one knows for sure, and one can spend days trying to synthesize all the available information and reach some conclusion.

From a financial planning perspective, however, asking about “the trade” is the wrong question. Instead, it’s more important to focus on your “trade-offs.” Financial planning involves the allocation of a finite amount of time and money; trade-offs exist because we don’t have unlimited reserves of either.

Consider the following financial trade-offs:

  • Should you work an extra year or two or retire?

Oftentimes one or two extra years of work can really improve your financial plan’s chance of success; but maybe you’re ready to retire because of the stress or maybe you want the freedom to spend your time on your personal projects or with family.

  • Should you buy that second house you’ve always dreamed of?

You’ll have to take money from your portfolio and/or increase your monthly expenses, but maybe you can live with that.  Maybe that second home will be a gathering place for you and your family for years to come and maybe you’re willing to reduce some of your current spending in order to purchase the home.

  • Should you buy long-term care insurance or maintain your current lifestyle?

This could be a significant insurance expense likely for the rest of your life but maybe you want the peace of mind that the insurance provides with regard to your plan for aging.

These trade-offs and the many others we encounter each day force you to prioritize.  You will likely have long interesting discussions with your spouse and/or your family and hopefully your financial planner.

In the long run, your opinion about the next trade probably doesn’t matter all that much. But when it comes to your trade-offs, your opinion will be one of the only ones that does.

About Joseph Marques

Follow me on Twitter: @WFA_Joe
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