The year is quickly ending on what has been a challenging period for investors. There has been much to consider including skyrocketing inflation, interest rates hikes, global conflict, and a very volatile market. Despite these stories, investors can often find some clarity by taking the time to work through a financial plan with a qualified Wealth Advisor or revisit the plan they have in place already.
A financial plan is the cornerstone of proper investment management. A well thought out plan should answer the question of why someone may invest at all, and without an answer to why someone is investing, it can make volatile markets very difficult to navigate. Let’s explain this further.
Suppose an investor has no plan at all and decides that they want to earn 7% a year. They may save diligently, pay off debt, and do all the right things over the course of the year, and once the calendar year flips over, they look back and decide success merely based on the increase or decrease in their portfolio. If it has increased by 7% or more, this is success. If it’s less, it causes alarm or concern. Because there is no plan, there is no cornerstone to explain whether they are on track or not.
A second investor works through a financial plan with their Advisor. During these discussions, various goals are plotted out, including retirement, future vacation home, even their final wishes for their inevitable estate disbursement. Along with this, the Advisor has included all aspects of the investor’s net worth, family details, ability to save, cash flow, and investment strategy. As a prudent move, the Advisor plots the assets in the plan to earn a very conservative return – perhaps even a pessimistic rate of return.
The second investor goes through the year and focuses on their goals which were laid out in the plan – saving enough, paying off debt, getting wills written. Naturally their accounts change with the markets as well. During their annual review with their Advisor, investors can look back at what was accomplished and compare it where they thought they would be.
A shortfall in this case tells the investor that something was off according to projections – perhaps it was rate of return, perhaps they didn’t save what they thought they could. However, if the Advisor used conservative assumptions the plan will indicate that the numbers are mostly on track. A single bad year of market performance doesn’t ruin a 30-year plan and it’s expected that things will change from year to year.
The focus between the two investors is a shift away from how the portfolio is performing versus how the plan looks relative to the long-term goals that have been established. The point being, while the first investor wanted a 7% rate of return, they have no idea if this number will help them achieve their goals, or even what their goals are.
Good Advisors want their clients to have a plan. During a bad market stretch, an Advisor can look back at the plan and see where the client stands compared to where it was estimated they would be. In my experience, clients tend to be surprised that even in a negative year, they remain intact on their goals. The conservative approach along with a focus on goals changes the perspective and gets away from worrying about the markets, and instead of following a plan that was made with multi-year projections.
A financial plan provides peace of mind and focus. Advisors should take the time to walk through all the pertinent elements of a plan and provide investors with perspective and insight, but moreover answer all the ‘whys’ of an investor’s unique financial circumstances.
If you do not have a plan, a down market can also be an excellent time to have one prepared – often starting from a low point can help provide enthusiasm as things inevitably improve. I encourage you to contact a qualified Wealth Advisor and start today.
Derek Fuchs is a Senior Wealth Advisor and Portfolio Manager with Scotia Wealth Management based in Red Deer. He writes this column to help educate and inform local investors. Have a question? Email Derek at derek.fuchs@scotiawealth.com anytime.