Worried about markets or all part of the plan?
As I write this the FTSE 100 is up 0.2% today. Yesterday it was down close to 1.0%. In the last week it’s down, over the last month it’s up, but over the last 3, 6 and 12 months it’s down. We are clearly in a period of volatility. After seemingly steady growth in markets for the last 10 years its to be expected but worries about Brexit, US/China and the gradual unwinding of QE aren’t helping. Investors should understand that past performance is no guide to the future and investments (and the income from them) can fall as a well as rise. Fluctuations in investment values are to be expected and are part of the investment cycle.
So as an investor are you glued to your screens, checking portfolios and markets daily? Or are you secure in the fact that your investments are one part of your long-term financial plan?
Investment advice and financial planning aren’t the same thing. Its true that they often go hand in hand, also that in most cases for a good financial plan to succeed you need some good investments within that plan. But the financial plan comes first and is the most important part.
When I meet a potential new client the majority of our first meeting (sometimes meetings) are spent with me mostly listening and asking questions. I spend a lot of time getting to know people, trying to find out what their goals and aspirations are. This can take time and can involve a lot of conversation but it’s the most worthwhile and important part of the process.
Everyone is different but with relative certainty I can say that the end goal is rarely “investment growth”, more often “I want to be able to retire early and travel/spend time with my grandchildren etc”. It can get much more complex of course with companies, larger sums and intergenerational planning but the point is the same – investment growth is not often the goal, but it can often help to achieve that goal.
After understanding their true goal we will talk about investments. Experience of investing, views on risk, ability to withstand losses etc. We will talk about how we approach investments, our philosophy, what to expect. This is a very important part of the process but always comes second.
After this it is my job to go away and construct a full financial plan. This can be simple or it can be more complex, it depends on the circumstances.
A true financial plan will be bespoke for that person/family. It will take into account their circumstances, their objectives and their views on risk. It will include expenditure analysis, cash flow modelling and in most cases there will be some investments within it. The plan should cover short-term needs and address medium term objectives. It will be hoping to address long-term objectives too but be flexible enough to change with the individual, life has a habit of making our plans change!
If a plan is put together well the investments within that plan should not need to be called on in the short term. The plan will make sure there is enough cash to call on in emergencies and sufficient income for their needs (or it will be working towards this as priority). It should protect against unforeseen circumstances such as illness and not being able to work. It should be fully discussed so the clients will be completely aware of the potential that the investments within have for falls in value, indeed they should expect falls in value as this is part of investing. They should be secure in the knowledge that they have a plan that is long term, that it has been stress tested and the investments within that plan and their movements up and down are all part of it – not the sole focus.
Hopefully this means they don’t have to be glued to the market app on their phones and can spend time enjoying their lives and continuing to build towards their long term goals, whatever they may be!