How Resilient is Your Financial Plan?

This blog is courtesy of Russ Thornton of Wealthcare for Women.


The Dickens classic A Tale of Two Cities begins, “It was the best of times, it was the worst of times . . . ”

Though originally written in 1859, Dickens could just as easily have been talking about current times.

I don’t have to highlight some of the present day “worst of times” we’ve experienced in recent days, weeks and months.

But I believe it’s also important not to lose sight of the “best of times” that we not only enjoy but often take for granted.

Since I don’t own a crystal ball, nor do I work at a carnival, I’m not in the prediction business in any shape or form. But the market and overall economy has been on a generally positive trend as of late.

That might continue. It might not.

But as the market (and your investments) goes up in value, it’s easier and easier to forget how quickly the market (and your investments) can go down in value.

I’m reminded of this great Warren Buffett quote,

The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities – that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future – will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.

But this is about much more than your investments relative to the market.

It’s about your financial plan, and your life.

What happens to your financial plan, not if, but when, the market goes down by 10%, 20% or more in the future?

Is your financial plan resilient enough to withstand this almost certain future scenario?

How resilient is your financial plan?

For those without a financial plan that ties their financial resources to their lifestyle, it’s tempting to make a decision that feels safe but can be very costly in the context of the rest of your life. These are people who will “get out of the market” until things calm down.

I recently spoke to a woman who got out of the market after it had gone down in 2008 and is still waiting for things to settle down before she reinvests.

The better approach, I think, is to have a balanced portfolio that works hand-in-hand with your personal financial plan.

You don’t need – nor do you want – a portfolio that tries to beat the market and in doing so just beats you up instead.

No, you want a portfolio that will allow you to stay invested through good markets and bad. You’ll likely miss some of the upside, but more importantly, you’re likely not to experience all of the downside.

This is particularly timely as I’ve been having more and more conversations with folks about why we have as much fixed income (bonds) in their portfolio as we do.

“Shouldn’t we move more to stocks since stocks are going up right now?” they say.

If we were simply chasing returns and focused solely on their money, then perhaps that is the right strategy. I’m not sure, because I’m not in that business.

Instead, I’m trying to help people get the highest return on life with the money they have or expect to have (through savings) in the future.

In this context, I want to take as little risk as possible while still supporting a sustainable lifetime financial plan. And when pressed to really explore why they’re coming to me for help, that’s what my clients tell me too.

But it’s easy to forget this when the the market’s going up and you feel like you’re missing out.

Unfortunately, despite some of the slick advertising and marketing by Wall Street, you can’t have it both ways.

You can’t consistently time when to get in and when to get out of the market. Remember the Buffett quote above about the “clocks have no hands”? It’s true.

And if you can’t time when to get in and when to get out, but you insist on chasing returns as they’re going higher and higher, it increases your chances of capturing more and more of the downside when (not if) markets eventually go lower. Perhaps a lot lower.

But again, let me remind you that this isn’t simply about your portfolio and the value of your brokerage account, IRA or 401k.

It’s about your life as reflected in your financial plan.

It’s much easier to think about retirement planning, funding your child’s or grandchild’s education, making charitable gifts, traveling like you’ve always wanted or whatever is important to you in a “best of times” environment.

But what about facing some of these same decisions when the market is falling?

What adjustments and trade-offs are you willing to make to keep your plan on track and still pursue your goals and aspirations?

Just like you go through the lifeboat drill when your cruise ship is still safe in port, you need to think about and quantify what you’re willing to do (or not do) before your financial plan comes into contact with your life and all the dynamics and changes it ultimately brings.

So whether you consider yourself an optimist or a pessimist. Whether you think of today as the “best of times” or the “worst of times.” Whether you have a portfolio that is based on a personal financial plan or not.

Just consider the resiliency of your financial plan and how well it (and you) can withstand the inevitable challenges ahead. Even if those challenges are hard to imagine today.

If this is something you’d like to discuss or you’d like to stress test how resilient your financial plan is, please get in touch. It’s important and something I’d love to help you with.



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