When financial planners are asked at parties about what they do for a living, many hesitate to be specific because the inevitable follow-up question relates to where they think the stock market, the currency, interest rates or the economy are heading.
The myth that a financial planner is a type of prophet with special powers for foreseeing the next big crisis, boom or bust perpetuates. And, to be sure, some advisers position themselves as smart forecasters or market timers.
The best planners, however, will tell you that they have no more idea than anyone of where the market is headed. They can’t tell you which will be the top and bottom performing stocks this year or what the central bank will do with interest rates.
A plan without forecasts
Of course, everyone will have an opinion on the economy or the efficacy of government policy or what the market might do next. But a good planner knows that that is the sort of conversation best held in the pub, not in the context of planning your future.
In any case, a financial plan should not be shaped in terms of a forecast for the market, but according to your needs, goals, risk appetites and life circumstances. In this sense, the planner is not an expert in prophecy but in possibility.
Your planner should start by spending some time learning about you – not just your assets, liabilities, income and expenditure, but also about your aspirations and expectations. From there, goals are set for the short, medium and long term.
The planner’s role is to connect those goals to an investment strategy that gives you the best chance of success by ensuring you stick to it. A forecast is not required. If the goal is long-term, the planner can be more confident of the capital market rates of return.
The keys to earning those returns are not market-timing or stock selection but diversification and discipline. The equity market will have more good years than bad, we know that. But there will be bad years, so the plan needs to allow for those by including bonds or other defensive assets.
Not every sector of the market will perform well at the same time, so the plan will diversify across and within many sectors and across different types of stocks – large and small, value and growth, developed and emerging markets.
Cost is another key determinant. The fees paid to fund managers can be a significant drag on the returns you enjoy, so the plan should consider the most efficient solutions. Taxes, too, can make a difference between the advertised returns of various strategies and what ends up in your pocket. A good financial plan minimises tax.
Finally, no plan is ever set in stone and forgotten about. There are two main reasons for this: first, markets are always changing. This can move your portfolio beyond the bounds of your risk appetites. Second, you will change: career, relationships, starting a family, moving house, health and other external circumstances. Plans need to be reassessed, portfolios re-balanced and goals reset to accommodate all of that.
A plan for all possibilities
The point is that none of this requires making bets on the future. It requires a financial plan that accommodates a wide range of possible developments and builds strategies to deal with whatever arises — an economic recession, an industry restructuring, a marriage breakdown, a health crisis — just life really.
A good planner knows that the investments, once arranged, must be regularly monitored and measured. They will have a clear, evidence-based investment process and changes won’t be made on a whim. But the most important element of the plan is you and your life and how well it is achieving your objectives.
The many variables that make the nightly TV news – geopolitics, rising or falling markets, currencies, interest rates, commodities – are all very interesting and we can debate them until the cows come home. But none of that is within our control.
A financial plan starts from what we can control — understanding your goals and preferences, building strategies that maximise the chance of meeting those goals, managing risk through diversification, controlling costs and taxes, exercising discipline and regularly re-balancing.
The controllable stuff may not be as interesting as the big political or market story of the day, but this is where your planner makes the real difference.
If you have any questions or wish to discuss any of the content further then please contact Iain Harper
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