Ask the average person to define a financial plan, and chances are they’ll describe an investment strategy. Even for some people who call themselves advisers, that’s what it amounts to. But a real financial plan is so much more than that.
To be sure, an investment strategy will form part of a financial plan. But a strategy that is not moored to your goals, risk tolerance, financial situation, family circumstances and values is not really a strategy at all. It is more likely just a product that is being sold off the shelf.
A real financial plan – as drawn up and constantly reviewed by an independent and licensed planner – is a living and breathing creation that begins with each person’s goals and aspirations and works back from there. The goals determine the strategy, not vice versa.
Never one goal
Another identifying feature of a bona fide plan is there is not one goal or one strategy. Most people will have a long-term goal, such as generating sufficient income to look after their consumption needs in retirement. But they will also have medium-term goals, like funding children’s education or paying off a mortgage or securing the care of elderly parents. And they will have short-term goals, like a holiday next year. Each goal will come with its own strategy.
Then there is the fact that your life rarely moves in straight lines on smooth roads. Recent events in our world provide a dramatic reminder that the unexpected and unplanned can force a rethink of even the most locked-in goals. This means that building a comprehensive risk management strategy will be a pivotal element of any plan worth it's salt.
Life insurance, disability protection and income protection insurance should all be considered, as will cash management, especially in a crisis. You may also want to think about your legacy. How will your estate be managed after you are gone?
Furthermore, a good plan will take account of the day-to-day as well as the long term. A planner will assess your immediate financial situation, including regular incomings and outgoings, tax structure and how best to manage your assets and liabilities — what you own and what you owe.
Dealing with unpredictability
The investment part of the strategy, the one that most people think of as constituting a financial plan, is not as straightforward as you might think either. Markets are unpredictable, as we have seen recently. So, a planner needs to balance the need to build a strategy that maximises your chances of getting to your goal with the one that you can actually live with.
You need your money to grow, of course. But you also need a shock absorber in your portfolio to help you deal with the inevitable downtimes. And you need sufficient cash as a buffer when unexpected events occur in your life or in markets. These considerations, along with your investment time horizon, all influence how your assets are allocated to stocks, bonds, property and cash.
Complicating matters further is the fact that nothing stays the same. When share markets have a strong year, for instance, you can find yourself with a portfolio that may contain more risk than you bargained for. A planner will rebalance your portfolio at regular intervals to keep you on track, taking some profits from assets that have gone up in price and re-allocating to those that have gone down.
An organic plan
So, a financial plan serves a wide range of functions. It connects your short-term, medium-term and long-term aspirations to different strategies. It takes account not only of those goals but of your ability to live with the inevitable volatility involved in getting you there.
A financial plan, therefore, is not a static document, but an organic one. It changes as your life and circumstances evolve. Careers change, children come along, education costs increase, children leave home, health challenges arrive, families merge, retirement looms.
You could think of a financial plan as a tapestry. It comprises many individual panels that are woven together into a whole. It may start out as one thing, but it frequently evolves in style and content as our life story evolves. It can combine many different themes but within an overarching story. In some ways, it is never finished.
Of course, no single plan can ever prepare you for everything that occurs in your life. But the plan is there to help you better prepare, to give you leeway when unexpected change comes along, to give you comfort and to make explicit the choices that you have.
When it comes down to it, a great financial plan is really a great life plan.
The value of investments and the income derived from them can fall as well as rise. You may not get back what you invest.
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