When one goes to a GP for what is perceived as a minor ailment, a quick fix is most often the preferred (and expected) remedy that will allow one to get back to normal daily routines. In a similar way, clients often engage the services of an adviser for a quick fix to their financial wellbeing. However, the symptoms displayed by one’s body are sometimes indicative of larger issues that need to be addressed and, in such cases, more serious adjustments may be required to ensure one’s health improves. Such adjustments must be approached with dedication and commitment to ensure that the symptoms and the underlying causes are addressed. It is no different with financial planning.
Holistic planning is critical
A common misconception is that one can apply a single-need analysis to address a single financial objective in isolation. However, that single-need objective may not be addressed effectively if other aspects of a holistic financial plan are not taken into account.
As a simple example, if an individual decides to address retirement planning without addressing a need for liquidity (such as can be achieved with an emergency fund), this could prove devastating in markets with higher risk in terms of job security. Should such an individual be retrenched, both the retirement planning objectives and immediate income needs will be in jeopardy. Holistic financial planning that may take decades to address should therefore be the goal of those looking to achieve financial freedom.
Revisit your financial plans
A financial plan needs to be flexible enough to continuously evolve as life circumstances change. As an individual goes through life, and financial milestones are achieved, the financial planning journey will need to be restructured – to balance the need to use income to produce wealth, and (with increasing financial freedom) the ability to produce sustainable income from wealth accumulated. Life is full of uncertainty, so financial plans need to be re-evaluated regularly to ensure they continue to be aligned with your needs – particularly if unforeseen setbacks to the plan occur.
Top tips to reach your investment goals
Think of your income-to-wealth continuum. Does your income need to produce wealth, or does your wealth increasingly need to produce income? You can think of this continuum as a series of cash flows across your lifetime (and even into future generations). Life is not as simple as having 40 years’ worth of steady income to plan for a sustainable lifestyle after retirement. It is prudent to plan for unexpected events that may occur along the way – both setbacks (such as retrenchments, loss of dual income in a household, or additional unplanned dependants on household income) and windfalls (like bonuses, inheritance, or tax rebates). Use these cash flows to bolster your holistic financial planning objectives.
Understand your risk requirements holistically
Your investments devoted to achieving long-term financial goals (e.g. retirement and legacy asset planning) may include more growth assets, so their return profiles will be fundamentally different from those of your conservative assets (e.g. the assets in an emergency fund). Understand that your plan needs this exposure to the risk associated with the returns that growth assets are more likely to deliver.
Time in the market is everything
Don’t try to time the market. Not only is this almost impossible to do with any certainty, but it also carries a high degree of risk. The optimal way to try and achieve consistent and attractive returns is to be invested through all market cycles in a time horizon appropriate to your plan. Ensure that your financial planner explains what to expect from your portfolios through different market cycles, so you can manage your behaviours when markets react unexpectedly.
Don’t fall for the latest fad
Not all investors in any given asset class participate in the indicative returns of that asset class. This applies to listed and unlisted growth assets, as well as regulated and unregulated ones. Be sure to invest in assets around which you can plan your investment goals, and which will help achieve the returns expected of these asset classes. Importantly, make sure you diversify your portfolio so that you are not exposed to the concentration risk that can result from having ‘all your eggs in one basket’.
Revisit your plan annually
A regular assessment of your plan is crucial to ensure you’re on track. One of the best ways of making sure that your holistic financial plan continues to be well balanced and co-ordinated to deliver on all of your investment goals is to regularly revisit your plan with your financial adviser.