Every financial plan needs a check-up

Has your plan had one lately?

By Stephen High

If you want to see the greatest threat to your financial future, go home and take a look in the mirror.
–Jonathan Clements, Wall Street Journal, April 27, 1998

Developing the right investment plan is among the most important decisions a prudent investor faces. Just as a second opinion regarding important medical decisions can provide reassurance, a review of your existing or proposed investment plan can be a great benefit to you and your family.

Consider a typical family’s investment profile. Over the years the family has grown, careers have been established, and several investment advisors have been consulted. The result could be a hodgepodge of investment accounts with different financial advisors and confusion over which investments, if any, are appropriate to meet your short- and long-term financial needs. Using multiple advisors tends to create tremendous redundancy, often resulting in a lack of diversification and no clear direction for your overall portfolio.

One size does not fit all.

There is an appropriate investment plan for everyone. If your portfolio is too aggressive, you may be taking unnecessary and uncompensated risks that could adversely affect your family’s financial future. Conversely, if your portfolio is too conservative, you may be giving up potential wealth that could secure your family’s financial wellbeing. But you won’t know unless you have a sensible investment plan.

What is an investment plan and why do you need it in writing?

An investment plan establishes reasonable expectations, objectives and guidelines for the investment of your portfolio’s assets. It creates the framework for a well-diversified asset mix that can be expected to generate acceptable long-term returns commensurate with the level of risk suitable for you. The plan sets forth an investment structure detailing permitted asset classes and desired allocation among asset classes. It also encourages effective communication between you and your advisor as well as serves as a reference over time to provide long-term investment discipline for you.

A written plan allows you to clearly establish your investment time horizon and goals, your tolerance for risk, and the prudence and diversification standards that you want the investment process to maintain. It also helps identify your need to take risk in light of such factors as your financial objectives and income stability. Studies have shown that investors too often act on emotional responses, generally to their detriment. A written plan helps assure rational analysis is the primary basis for important investment decisions.

Periodic review is essential.

If you have a written plan in place, you should review it periodically to see if it still meets your financial objectives. We recommend that you review your plan and make appropriate changes when you experience significant life events, such as job changes, retirement, disability, divorce, death, or you become an “empty-nester”. You should never make changes in anticipation of “predicted” changes in the market.

If you do not currently have a plan in place, you need a trusted financial advisor, who acts in your best interest, to help you develop a sound plan. If you do have one in place, the trusted advisor should review it with you and make any modifications necessary to ensure that it will help you achieve your financial goals.

Your personalized plan should address several factors that are essential to achieving your objectives. Among them are your ability, willingness and need to take risk. Your ability to take risk is determined by three things: your investment time horizon, the amount and stability of your income, and your need for liquidity. The longer your time horizon, the more stable your income, and the less your need for liquidity, the greater the risk you are able to take by investing more in equities.

Your willingness to take risk is determined by your ability to withstand the stress of significant bear markets, such as the years 2000 to 2002 and 2007 to 2009. Your need to take risk is determined by the rate of return necessary to achieve your financial objectives. The greater the return needed, the greater the equity risk you ought to take.

Other factors should be considered as well. These include your investment objectives, life goals, other assets that you own, family needs, your age, marital status, and health, to name a few. A good trusted advisor can consider all of these factors and develop a personalized investment plan that includes a globally diversified portfolio allocation suited to meet your needs.

When placed under the microscope of expert analysis, some investment plans turn out to be in perfect health. Some need minor adjustments. Some are candidates for major surgery. Regardless, a periodic review of your investment plan is important to achieving your lifetime financial goals.

If you don’t have a financial plan in place, let our team at Kraft Asset Management help you develop an investment plan to meet your financial goals and dreams. If you already have a plan in place, we’d be happy to give you a second opinion at no charge.