The value of financial advice in extraordinary times
, Written By Synergy Investments
These are extraordinary times. Although the immediate outlook with respect to Covid-19 remains unclear, times like this provide a stark reminder of the importance of having a financial plan and undertaking regular planning meetings.
We work with many of the best financial advisers in New Zealand who help individuals create an investment plan to reach their financial goals. The purpose of that plan is twofold. Firstly, it helps investors to carefully consider what they really want their savings to achieve for them in life. And secondly, it encapsulates the disciplined behaviours necessary to make those plans a reality. Plans are an unqualified good thing for investors. What they are not, is a crystal ball.
In every plan there are assumptions. The assumptions include what you’ll save, what you’ll spend and what returns the market should deliver, on average. These assumptions are the best collective approximation that the adviser and the investor can make at the time the plan is written. All parties understand that circumstances and markets will change. But that’s okay. Making assumptions upfront doesn’t negate the benefit of a plan. A plan crystallises where investors want to go which means advisers can regularly determine if their current actions are prudent in order to get there.
To use an analogy, a plan is like a map, but planning is like navigation. A map is useful to know where you want to go, but navigation is the critical skill to successfully complete the journey. So, the real benefit an adviser delivers isn’t the plan, per se, with its initial assumptions, but in planning, or according to the analogy, in navigation. It’s the exercise of planning which tells investors if their current actions are consistent with their desired destination.
"Although these are extraordinary times, a good strategy and process doesn’t change just because market conditions do."
In light of recent market volatility, some investors will question if their initial plans are still on track. To answer this, an adviser will ask if the goals the investor set out in the original plan are still the same goals they want to aim for today. In some cases, plans will have changed, especially for investors that own small businesses. If goals and objectives have changed, then the plan will need to change with new actions being created.
If the investors’ goals haven’t changed, then many will still be on track. We are coming off an extended period of strong market returns going all the way back to 2010 which, for many investors, has generally put them well ahead of where they expected to be as we entered 2020. Further, advisers that we work with generally build a margin of safety into their planning, meaning their clients should still be able to achieve their goals, even if market prices have recently declined.
Nevertheless, whenever advisers review a plan they will determine if the current market correction requires them to change course.
For example, if an investor’s plan is off track because of recent volatility, an adviser might discuss whether the investor can increase savings, reduce spending, extend work, or switch to a more growth-oriented portfolio. Any of these choices could increase the probability of achieving the investor’s long-term objectives and help get the investor back on track. Which ones the investor and adviser ultimately agree on, if any, will depend on the investor’s capacity to make a change and their preferences about which of these changes they feel most comfortable with.
The right course of action during times like this isn’t always to buy, hold and pray. The value of advice is based primarily in the planning (or navigating) process. When an adviser takes into account an investor’s current position, new actions may be prudent to get back on track.
Nearly everyone reading this will have lived through the Global Financial Crisis (2007-2009). Most will also remember the bursting of the tech bubble (2000-2002). Some will even recall the 1987 share market crash. With these experiences to draw on, an adviser and most investors have some intuitive understanding of how to act responsibly in volatile markets. An adviser’s guidance should always be to reinforce objective long term thinking, which is one important element in keeping investors on track to achieving their long term goals.
Although these are extraordinary times, a good strategy and process doesn’t change just because market conditions do. As an investor, if you have any immediate concerns, please contact your adviser or schedule an appointment. Your adviser is there to support you and help you to navigate these market conditions with confidence.
If you don’t already have an adviser, someone to work with you and help you navigate these extraordinary times, it’s never too late to find one.
Head of Adviser Services, Consilium