Events over the past several years have left investors with persistent anxiety about the future. The tech bubble, Financial Crisis, and COVID crash all caused markets to plunge with a velocity that could permanently shake even the most enthusiastic investor. People are constantly worrying about when the next crash will occur, what will cause it, and how it will impact their finances.
As markets have performed well since March 2020 lows, it is a good time to reiterate why we engage in Financial Planning. Quite simply, we plan to control the things we can. We cannot control when the next external shock will occur such as a war, natural disaster, or political surprise. We cannot control what the economy will do or when interest rates will rise. The philosophy of financial planning is to put these things aside and take a proactive and comprehensive approach towards the things we can control. They include:
- How much to save before retirement. Knowing what savings rate is necessary now to maintain your family’s lifestyle later is essential to improving future outcomes regardless of what happens with markets from year to year. This ingredient varies dramatically based on one’s expected lifestyle, time in retirement, and expected longevity.
- How much to spend in retirement. Markets could perform spectacularly year after year. But if one overspends versus their assets and time in retirement, they can still stress their finances. Conversely, having the knowledge you are likely to pass with substantial assets could enable you to consider a range of options beforehand such as spending more, gifting to family sooner, or giving to charity.
- Asset allocation. People often think of asset allocation as simply another form of diversification. We at CIC view it as a way to properly align one’s portfolio to their risk tolerance and “time-weight” the portfolio to correlate with projected spending. Done correctly, asset allocation should not be an arbitrary decision. It should align the proportion of stocks, bonds, and cash/cash equivalents to the specific family’s spending needs as outlined in their financial plan. This helps ensure one has the cash they need lined up for when they need it while avoiding having to sell stocks low. Asset allocation also allows stocks the time they need to ride out volatility and recover from market corrections.
- Investment selection and diversification. Investments are as varied as the world they represent. Ensuring you are diversified by geography and market segment helps protect a portfolio from irrecoverable loss during down markets while capturing upside regardless of what shiny object the financial media happens to be chasing at any given moment. ETFs and Mutual funds can then be screened for performance, cost, and focus versus peers. Stocks can be screened for cash flow, debt levels, and a variety of other financial metrics.
- Estate planning. Estate planning can be used to make strategic decisions now on the future of assets depending on the projected growth of one’s estate over time. This can include different strategies depending on family structure, attitudes, and values towards wealth.
Markets have been growing rather consistently since the March 2020 COVID lows and it can be easy to get complacent. Having a Financial Plan means you have already taken steps to mitigate the impact of the next down market by aligning your assets to the goals in your Financial Plan.