Fundamentals of Financial Planning that Wall Street Forgot

by Edi Alvarez, MSc, CFP®


tumbling dollar billsWall Street succeeds when one investor sells and another buys. Reward is derived from the sale without reference to the investor’s personal circumstance, needs or goals. “The Market” determines the fair value of each sale. It’s an amoral transaction that assumes the purchaser has done their due diligence – evaluating both risk and potential return. Caveat emptor.

 Conscientious investors will at least pay lip service to Wall Street metrics, actually combing through the latest prospectus before making their purchase (even though the docu­ment may be weeks, or sometimes months out of date), attempting to fathom what sometimes seems unfathomable. Better than tossing darts. Alas, Wall Street is much better at helping you with the investment purchase than helping you determine if you should sell it. Where’s the prospectus for that. So, in a desperate effort to anticipate rallies or declines, investors will rely on trends, tips, promises, celebrity pundits or the alignment of planets. There’s only one clear consequence to all this – an investment decision that lags the market stands a better chance of losing than making a profit. Although Wall Street benefits every time we react to FEAR, it can’t control the extent to which fear spreads and undermines investor confidence.

 The investment bankers on Wall Street forgot something financial planning clients learn during their first year engagement – they forgot that emotional impact during a down market alters people’s risk perception. With a focus on the market, instead of one’s own financial plan, FEAR takes over and often the reaction generates huge losses. Let’s examine how well financial markets handle risk capacity, tolerance and perception. In the last year, market-to-market pricing (1) brought a level of reality to the valuation of securities that had been overpriced. As a result of bringing reality to the pricing of these securities, many financial organizations are forced to re-evaluate their debt and assets (even if they do not wish to sell them) as other financial organizations drastically discount similar securities. Financial organizations that hold any of these discounted assets could easily lose fifty percent of their value in a short timeframe, BUT only if the market “thinks” those positions were overpriced.

Some would like to ban market-to-market pricing which reveals what an asset is really worth today (2). I would say that the problem is not with market-to-market pricing accounting, but rather with the fact that these organizations did not develop a way to adjust to the expected downside of such investments. After all, the executives creating and selling these products are very well compensated and should plan for all eventualities. A lack of planning served these firms well during market rallies since they were paid on gains NOT on how well they protected against a downturn. To now ask the tax payer to pay for this protection seems to me to be enabling those who chose not to plan. Is anyone looking at a risk-return plan for the $700B bailout package? It seems like we are continuing to react to Wall Street instead of planning for our country’s financial goals.

In retrospect, if these firms had adhered to the fundamentals of financial planning, they would have carefully analyzed the risk in these investments particularly during a down market. Presenting this information clearly to investors would have helped all of us to weather the current financial storm within our own return-risk tolerance.

Let’s face it; even the so-called pros don’t always make the best market decisions.

If you can’t trust in Wall Street, what is the average “Jane” to do? Plainly, putting your hard earned cash into a low-interest CD or Treasury note that barely keeps up with inflation is not going to prepare you for all of life’s vicissitudes.

Ask yourself this – did you foresee the extent of the current global financial crisis? Okay, smarty-pants, if you answered “yes,” did you (and do you still) feel secure about your investments? Well, maybe you did, but most do not. The majority invest in Wall Street without a strategy or plan or an understanding of their tolerance for market downturns. A well de­signed financial plan should give individuals the confidence to lead their busy lives without worrying about Wall Street.

Despite what you may have heard, financial planning is not about accumulating as much material wealth as you can, nor is it all about investing, or buying life insurance. Although these are components of a financial plan they are not at the core. Financial planning is actually a process that captures, and to some extent quantifies, your attitudes and perceptions about money. The end result is a clear and concise approach that is specifically designed to help you make financial decisions supporting your goals – it takes into account your likely reactions during different markets, ensuring that you can and will stick with your plan. Those goals, of course, vary according to individual and circumstance and require that you regularly update your plan.

The process can delineate a target for retirement and determine when it might be reasonable to buy a car or fund a worthy charity. It can shed light on what you value most and ensure that those values are supported and protected. It can help you to identify what will be your life’s focus. Will it be your career, family, travel or some combination of these or other goals?

Successful financial plans have two things in common. They make it possible to live life relatively free of financial worry, regardless of the state of the economy. And, they provide a clear internalized rationale for financial decisions. You will know how you can use your resources now and in the future.

The financial planning process starts with careful exploration of your goals and deeply felt personal values and attitudes. Goals need to be clear and measurable. They can include your career, dreams, and expectations for the short, medium and long haul. Once you fully understand what you really want out of life, your financial planner can help you evaluate all available resources and help establish how to best align them to fully support your goals. No less important is a thorough study of your financial exposure so that you can determine any risks involved (i.e., those things that could derail your plan).

Ideally, your financial plan will furnish you with “the big picture” – your finances, including your employee benefits, re­tirement planning, taxes, insurance, investments and estate planning. Although integration may take some time, each sphere must be viewed in an integrated manner that takes into account your goals and risk profile.

Communication is essential when you are working through your financial plan. Your planner-adviser must acquire an intimate appreciation of your capacity and tolerance for volatility. First they will look at your capacity to tolerate changes in the market which depend largely on goals and how well they can be met with existing assets. Once you review your plan for example, you may need to invest in riskier securities, sell certain assets, or self insure certain exposures so that you meet your goals. That, or face facts and adjust your goals accordingly. Risk capacity is really less about your emotions and more about what assets you have and how well they support your goals. Although your tolerance for risk is usually fairly constant, as markets ebb and flow you will likely find that your risk perception changes (3). Perception can make you fearful of down markets or can fill you with a sense of opportunity. Either way, a well crafted financial plan will facilitate the allocation of your resources according to your level of risk capacity, tolerance and perception.

A solid financial plan is a form of protection from your own reactions during emotionally charged situations that are beyond your control. In addition, a fully diversified financial plan should not set you up to lose more than what you have the capacity and tolerance to lose even when one asset is drastically marked down. We all need to look at our own plan and to see that it provides protection, is fully diversified, and will allow us to move through life challenges. Are our politicians preparing such a plan for us? Are we preparing such a plan for ourselves?

Financial planning, you should understand, is not a one-time event. The process in its ideal form is an ongoing and lifelong commitment to measuring where one is, exploring possibili­ties and adjusting our path towards our dreams. When Wall Street does not expose and explore the downside risk of products they thwart our efforts for long term steady earning and replace it with short term volatility that increases transactions but add little real value. In my view, this is where regulation should play a role, requiring that risks be quantified clearly and timely for investors.

Why should you undertake a financial plan? As women, we are often at the center of multi-generational support entailing a financial component. As scientists, a financial plan should be a no brainer. Our entire career is based on building processes that allow us to move science forward, be they grants, proposals, articles, IP or IND filings. We’ve worked gathering and organizing scientific findings in a systematic manner that can yield some insight or help us evaluate and advance our scientific field – we plan every day of our lives to ensure that there is a logical process to our scientific endeavors. In addition, as educated participants in this economy we notice that the current global economic crisis demonstrates that those in charge do not have a plan and do not provide us (the investors), with clear information on our exposures. Although some think that financial planning is distasteful, in my experience it is a life changing and gratifying effort, almost an epiphany.

What can a financial plan do for you in these times of eco­nomic and financial uncertainty? First and foremost, it can render your financial options into clearly defined actions designed to help you reach your goals. Should new opportuni­ties arise – a new job offer, a new investment, a child or retirement – you will have a structure within which to make each decision. With a financial plan in place, the time and effort required to make these complicated decisions is drastically reduced. By definition, you will have established a well diversified portfolio. Your diversified, risk adjusted, asset allocated investment plan will take advantage of opportunities to reach your goals without taking unnecessary risk or diverting precious resources beyond your risk tolerance.

A financial plan will establish how you perceive risk and how you may react to a downturn, identifying precise ways and means to overcome those fears (leading to less anxiety when the market takes an unexpected downturn.) It will state in no uncertain terms what you really have available each month and how much you need to make available to enjoy your life and reach your stated goals. It will address your exposure with an emergency/security fund that truly matches your particular risk of unemployment or illness, or the possibility of upcoming career changes. Sometimes, it will reveal that perceived need doesn’t match reality so you will need to adjust your goals. It will evaluate what exposure you have cov­ered and whether the existing coverage meets your current and future needs.

My advice? Whether or not you work with a financial planner, use this time to evaluate your financial condition. Do you have a structure on which to make financial decisions?

Do you understand your capacity, tolerance and emotional reactions to risk? Has the failure of Bear Stearns, Northern Rock (first run on a Bank in Britain since 1866!), AIG, Lehman Brothers and WAMU caused you anxiety over your financial future? If so, set up a plan that will allow you to build the resources you’ll need in the future and feel confident that regardless of what happens in the economy, in the markets, or in your life, you have a structure and an understanding of how to direct your finances so that you remain aligned with your goals and do not give in to emotion (4). Some will think that this does not apply to them since they don’t have enough money to start to plan, but this is not just about money. Don’t leave your financial decisions to emotions or last minute decisions (3). Get to know yourself and how you react and handle choices in your life (4) – don’t let Wall Street rule your life, take control and you will be better able to weather “The Market” which none of us control. It is never too soon to start to add structure to your financial decisions.



1. Bernard, V.L., Merton, R.C., & Palepu, k.G. (1995) Market-to-Market Accounting for Banks and Thrifts: Lessons from the Danish Experience. Journal of Accounting Research 33(1).

2. Petruno, J. (2008) To Help Banks, Some Suggest rewriting Accounting Rules. Money & Co. Tracking the Market and Economic Trends that Shape Your Finances. Los Angeles Times, September 30, 2008. More information can be found at: http://latimesblogs.

3. Roszkowski, M.J., Davey, G., & Grable, J.E. (2005) Insights from Psychology and Psychometrics on Measuring Risk Tolerance. FPA Journal 405, 1-12.

4. More information on your Risk Tolerance can be found at the FinaMetrica website: (2008)


Edi Alvarez, Principal, AikapaEdi Alvarez works in the financial services industry. She holds a Master of Science and Bachelor of Education and Bachelor of Science degrees from Queen’s University, Canada, and serves on the executive board of the San Francisco AWIS Chapter. Edi can be con­tacted at




[Originally published in AWIS Magazine, Fall 2008.]


© 2008 Edi Alvarez. All rights reserved.