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Efficiently Harnessing Market Returns for Investors.

The Importance of a Financial Plan

It is impossible to achieve a goal without a plan. The reason that we invest in the first place is to arrive at a future financial destination, but the journey is long and the destination can be far. Having a plan in place allows the investor to focus on long range financial goals and eliminate the need to worry about short term fluctuations in the economy or the capital markets.

A financial plan accomplishes a number of objectives:

A Compass in the Storm

A full economic cycle contains a peak, a contraction, a trough, and a recovery. Studies have shown that we go through this pattern on average more than once per decade. With every economic cycle comes gyrations in the capital markets that can be unsettling for investors. The reality is that most people will experience numerous economic and market cycles in their investing lifetime.

As we think about these cycles, it is helpful to consider the metaphor of being in a small boat sailing on the ocean. The current is gradually moving us toward the shore (our goal), but when big wave hits our little boat, things get uncomfortable and it can feel like we're not going to make it. Too many times, investors are tempted to be active with their portfolios in an effort to right the ship when the market gets choppy. The key to getting safely to the destination is not to try to control the boat and respond to each and every movement. Rather, we need to make minor corrections that generally keep us pointed toward the goal and then patiently ride out the storm. A sound financial plan becomes that financial compass and insures our boat doesn't sink.

We only have to look back to the credit crisis of 2008-2009 to realize the true value of a financial plan. During the depths of the crisis we discovered that it was far easier to evaluate the impact of the market downturn relative to a goal for those clients who had a financial plan in place. As we would do every year in the planning process, we updated the asset values and refreshed our future projections. Only then could we begin to draw conclusions about the future and the right thing to do. Rarely, did our analysis result in a need to change lifestyle or make anything more than minor adjustments to the goals. One element that did not require adjustment was our forward return assumption. The reason is that for a given long term investment period, the longer we go with returns that are below average, the more likely it becomes that the returns for the remainder of the period will be above average, assuming we are using a conservative average estimate. As asset values become deeply discounted in a contractionary environment, their potential return (risk premium) actually goes up for those looking for long term opportunities. Those investors that remain in the market become eligible to achieve those outsized future returns.


The process of sharing a wide range of financial information with the investment advisor greatly improves the quality of the advice that can be given. For example, when the advisor knows the allocation and dollar values of all of the client's assets, it is then possible to make recommendations based on the entire asset base, or at a minimum, compensate for exposures that may be absent in the accounts that the advisor is not managing. Using scenario analysis, the advisor can explore the trade-offs of changing certain variables such as retirement date, retirement spending, savings rates, tax rates, or any other data point of interest.

The financial plan should be reviewed on a regular basis. At least once per year, the advisor and client should meet in person to discuss any changes in the asset values and revisit the risk tolerance and other elements of the client's personal situation. Not only does this improve the relationship between advisor and client, but it also enhances the usefulness of the plan.

We highly recommend that every client have a financial plan in place that can guide them on the investment journey. Please ask us today how you can begin the process of setting up a plan for you.