Financial Planning in Turbulent Times

The financial planning process has never been more important than during these turbulent times. When dramatic world events occur and impact the financial markets, the economy as well as our health and that of our loved ones, it’s only normal to feel a heightened level of stress and anxiety, particularly when our investments are impacted negatively. History has shown us that market corrections will happen periodically, and one should keep in mind that much of this is short-term “noise”.

The process of financial planning helps you assess your goals as short term or long term, and in turn provides guidance to your investment advisor to align your investments accordingly. A well-designed portfolio by the JMRD Watson Team would take into consideration both your short term and long-term cash flow needs, as identified in your financial plan.

For those of you who have gone through the planning process, you’ll recall we have used relatively conservative rates of return ranging from 4.1% to 4.3%, depending on your risk tolerance. And in many instances, we’ve also done a “stress test” by reducing the core rate of return by 1%. You should weigh the recent market downturn against the positive returns we’ve experienced in the last few years and reflect on how that “nets” to the rate of return we used for the projections. Keep in mind that the rates of return were established based on standards set by FP Canada, the governing body for financial planning. As part of the planning exercise and again based on the standards set by FP Canada, we have also assumed most of you would live to the age of 96, which again is relatively conservative.

For the same reason that you shouldn’t become unreasonably exuberant in a volatile market where we’re experiencing 25% positive returns, one should be evenly tempered when the markets correct. The planning process helps you “see the forest for the trees” and should remind clients to stay on track and avoid the pitfalls of over-reacting during turbulent markets. Bear in mind that the goals and objectives you identified through the planning process shouldn’t change because we are now in a cyclical downturn in the markets.

When reviewing your accounts in light of recent market turbulence, focus on the goal of each investment or account – Were the funds invested for the short term? Is it a long-term investment you won’t need for several years? Keep in mind that changing objectives during turbulent times can have negative long-term consequences.

An integral part of planning is to monitor progress on a regular basis, be it every 2-3 years or if personal circumstances change substantially. Once the storm passes, a quick “checkup” may be warranted to give you peace of mind that you’re still on track to attaining your long-term goals.

A quick reminder of some sound financial planning tips to remember during these turbulent times:

Have an emergency fund: you should always have 25% of your core lifestyle needs tucked away in a high interest savings account, money market or any other liquid investment.
Review your budget and upcoming expenses: You may find that your cash flow needs have decreased given that discretionary spending has been significantly curtailed (no dining out, vacations cancelled and some entertainment on hold).
Align your short term goals with short term investments and long term goals with long term investments: if you need the money in the short term, you should choose risk-free or low risk investments, longer term goals can be aligned with a broader range of investments, including equities (within your risk tolerance).
Ensure your estate documents are current: although it may seem a little extreme, it would be wise to ensure you and your loved ones know where your wills and powers of attorney are located, should they be required.

Words of advice in this new environment: Get ready to review your plan, stay healthy and stay the course.