One of the famous sights in Acapulco, Mexico, can be found at a narrow cove called La Quebrada. There, swan-diving daredevils leap 115 feet from a jagged cliff. They splash into the shallow water, disappear for a few seconds, and come up smiling.
Many people about to embark on a program of financial planning probably feel like the diver making his first leap. They know thousands of others have successfully invested in stocks, bonds, mutual funds, gold, diamonds, and artwork before; but there are also those disaster stories. . . .
For many, the wisdom of leaping into some form of financial planning program is becoming increasingly obvious.
The problems of coping with inflation, revisions in the income tax laws, new estate tax provisions, and the ups and downs of interest rates are a few reasons more people are turning to professional financial assistance. And for those making retirement plans, the controversy over the future financial soundness of social security may prompt some people to seek the assurance of additional retirement savings.
If people have other plans or goals that involve saving and building a financial nest egg -- like college expenses, investment, home purchase or improvement, or just more money ''for a rainy day'' -- a systematic financial plan is practically essential.
The plan should be based on knowledge of the various investments, the person's income and ability to set some of it aside, and the capacity to accept a certain amount of risk and still sleep nights. ''What is your comfort level?'' many financial planners ask.
The plan must also recognize the tax implications of any investment. ''For 80 to 90 percent of the people who go to a financial planner, the single most important factor is tax reduction or tax avoidance,'' says Robert T. LeClair, a financial planner and dean of the American College, a new institution being set up in Bryn Mawr, Pa., to teach financial planning.
''In some cases, a good financial planner can reduce taxes considerably,'' Mr. LeClair says. He cautions, however, against using planners who promise overly large cuts in your tax obligation. ''It's easy for a planner to get a person in a great deal of trouble.''
Once it has been decided what a financial plan is supposed to accomplish, exactly how these goals are carried out depends on the individual. Generalities do not fit easily over any large group. But many financial planners use a formula based on a few -- often five -- levels of risk.
Planners differ over how much risk there is at each level. Some say, for instance, that while a passbook savings account appears to have very little risk , the less-than-inflation interest rate means these accounts are automatic losers.
The planners might also disagree about how much to invest at each level. James Schwartz, a financial planner in Denver, for instance, suggests 40 percent in the lowest-risk area, 20 percent in the second level, 20 percent in the third , 15 percent in the fourth, and 5 percent in the high-risk plateau. Others would put less than 40 percent in the lowest level, spreading the difference between the second and third levels.
At the first, or lowest, level of risk, conservation of capital -- not losing your original investment -- is the main goal. At this level, a person gets a high degree of protection for his money, in exchange for lower returns. Investments might include passbook savings accounts, Treasury bills, certificates of deposit, and money market funds. (Some of these, like T-bills and money funds, have been paying high returns in recent years.)
The second level consists of investments with some long-term risk but no speculation. These might include utility company shares, government-based mutual funds, annuities, or high-grade municipal and corporate bonds.
At the third level, with average risk, the long-term security of capital is a bit more uncertain. But over short to medium periods, the investment is considered fairly secure. This level might include income-oriented mutual funds, mutual funds investing in high-grade bonds, blue chip common stocks, real estate , and gold coins like those from Mexico, Canada, and South African Krugerrands.
The fourth level, with above-average risk, contains investments where growth of capital is more important than security. These fairly speculative investments might include growth-oriented mutual funds, real estate for future development, and common growth stocks.
The fifth level, with the highest risk, includes investments where the possibility of very high returns comes in exchange for the possibility of losing most or all of the investment quickly. The items in this group might include aggressive growth stocks, commodities, collectibles, and new stock issues.
Instead of levels, some planners use a ''pyramid'' concept, with the safest investments forming the wide base and the risky ones at the narrow top.
Probably the simplest way to put some money in all of these levels is to invest in a few highly diversified mutual funds, with a good history of investment performance. With everything from money market funds to growth funds, many mutual fund groups have proved to be an effective way to diversify investments.
Because your money is pooled with that of many other shareholders, a mutual fund gives you the chance to invest in a variety of industries you might not otherwise find practical. Also, moving your money from one investment area to another can be done with a phone call. And with a no-load fund, you can do this with no charge.
Whatever the system, nearly all financial planners emphasize, you have to be totally comfortable with where you put your money.
''I had a guy in here this morning, and I told him not to make a particular investment,'' relates Philip Cooper, who heads a financial planning firm, Philip Cooper Associates Inc., in Boston. ''It was a good investment. Some of our other clients have put money in it. I would put money in it. But I could hear him telling me he wasn't comfortable with it. So I said, 'Don't do it.' ''
A financial planner, Mr. Cooper emphasizes, should be willing to invest his own money in anything he recommends to a client. This does not mean the planner has to have money in it - there are only so many investments even a financial planner can make - but you should feel fairly certain of a planner's willingness to put his money where his recommendation is.
This willingness is one of five general criteria Cooper uses to evaluate an investment. The four others are:
1. Management. ''Who's running the investment?'' Cooper asks. Look carefully at the experience and background of the people who are running the company and asking for your money. If it is an oil-exploration deal, for instance, how have the principals in the firm done on previous tries? If it is a mutual fund, what kind of performance record does it have? In any investment proposal, have the principals been involved in securities-law violations with other projects?
2. The quality of the underlying assets. ''If I'm putting my client's money into anything -- real estate, oil, gas, livestock -- I want to know if they exist and what kind of quality I'm getting,'' Cooper says.
3. Economics. The investment should ''have real potential to produce eventual cash flow and growth,'' he asserts.
4. Sharing arrangement. ''Does the deal provide too much for either side?'' If the manager takes too much of the return, it's not good for the investor; if the manager promises too much to the investor, he may be overstating things.
Mr. Schwartz, in Denver, suggests that even if you didn't discover the investment yourself, find out enough about it so you feel you are making the selection on your own, not because a financial planner, broker, or relative says it's a good deal.
''Most people's portfolios consist of what they've been sold, not what they've picked themselves,'' he says.