Wise Wealth Management

Dennis Covington | Principal

Insights on the keys to enjoying a "healthy wealth".

A Good Plan Is the Main Key to Weathering Financial Storms

October 2008

Over the past few months I’ve had the opportunity to interact with many investors – clients, associates, friends and family – in the midst of the current financial storm. It seems most investors are weathering the market downturn with resolve, but I’ve also spoken with some individuals who panicked and abandoned their long-term strategy.

In thinking about the factors that caused some people to act rashly while the vast majority have stayed committed to their long-term strategy, three factors come to mind that, in the end, are all related:

  •  Having realistic income needs: Most people assume that the more money one has the easier it is to ride out one of these storms. While there is some truth to this, my observation is that it’s more the size of the income need relative to the value of the portfolio that determines an investor’s anxiety level in times of turmoil. Investors who are taking out the maximum amount of income that their portfolio can sustain without depleting principal can very quickly find themselves in a bind when markets drop dramatically, faced with the choice to either cut back on their income or dip into principal. Often such investors will panic in the face of turmoil and bail out of the market in an attempt to salvage their remaining nestegg. Unfortunately, such a decision will ultimately require the investor to take on even more stock exposure in the future to make up for their depleted portfolio, which will, of course, increase volatility – the very thing that got that investor in trouble in the first place.

In contrast, investors who spend time in advanced planning to be sure their portfolio can support their income needs in all types of market environments are typically more disciplined in the face of market turmoil.

  •  Choosing a portfolio strategy based on long-term return needs, not short-term market conditions: Over the years I have noticed that certain investors can’t resist the temptation to alter their asset allocation to become more aggressive in good markets and more conservative in bad markets. These decisions are market based as opposed to needs based, and usually result in poor investment experiences for the investor. In contrast, successful investors are those who engage in proactive planning to see what type of portfolio is required to support their desired spending level in the years to come, and then stick to that plan regardless of short-term market conditions. 

  •  Having a clear understanding of values and goals: Successful investors tend to view their money as a vehicle to accomplish the things they want in life. They set out to create goals that are aligned with these values and make sure their investment plan is aligned with both. Other investors are fixated on accumulation or preventing the loss of their dollars and have nothing to govern their actions other than emotions. It’s been said that most investors spend more time planning their annual vacation than they do their financial lives and it’s my observation that this is the case with most unsuccessful investors.

The common thread in all three of these factors is that a planning process separated successful investors from unsuccessful.

So what does a good plan look like? It’s not the 50-page bound document that many financial advisors offered investors in recent years, which were mostly boilerplate language with a few dozen action items at the end the client had to implement NOW.

A truly impactful financial plan will start by focusing on the investor’s values and priorities and then building the plan around them. The planning conversation explores a variety of areas, including values, relationships, assets and liabilities, interests, professional advisors, and more. A well-crafted plan is then built through a process that tackles a person’s financial life one step at a time; priorities are established and subject-matter experts are called in to ensure that a particular challenge or opportunity is handled in a manner consistent with the client’s values and goals.

It’s simple in concept, which is part of the beauty of a good financial plan. The difficulty comes in execution, and that is where the real value in working with an advisor who truly understands these issues comes in.

To read more about what I believe a good plan looks like I recommend reading our white paper, The Informed Investor, which can be found by clicking here.
 

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