Market ThoughtsSubmitted by Connecticut Wealth Management, LLC on January 20th, 2016
Many successful football coaches share a trait with great financial planners in that both plan for negative events in advance. If a good coach’s team is down 17 points in the 2nd quarter, he does not panic—he’s already mapped out, in the preceding week of practice, what would happen if the game took a downturn. These coaches prepare the team to flawlessly execute their game plan, but they also build in contingency strategies for inevitable momentum shifts out of their favor, and out of their control.
Good financial planners do the same thing. Any time the stock market declines meaningfully, as it repeatedly has since the start of 2016, it becomes apparent why advisors must spend so much time planning before an event occurs, not once it already has. By doing so, we can reference the comprehensive financial game plan that was established at the inception of the client-advisor relationship and once again be reminded of the long term goals the client has put in place. This allows conversations about stock market risk to be had with the end outcomes in mind, not merely the present.
If this scenario accurately describes the relationship you have with your advisor, sudden market declines can be jarring but are not likely detrimental to your portfolio’s chances of sustaining you throughout your life. To eliminate the risk of making emotional decisions during times of volatility, it’s more important now than ever to work with someone who will align the target risk/return profile of your portfolio with your spending needs, time horizon, and tolerance for volatility. For you, the beginning of this year might be an eye-opener that an undisciplined, knee-jerk approach to managing risk in your portfolio is not conducive to long term success.
A comprehensive financial plan involves all aspects of your financial life, including retirement planning, investments, income tax planning, insurance, estate planning, and more. All of these details should then be molded into a plan that details and dictates how much risk you need to take in the stock market to reach your goals and cash flow needs.
It is easy to stray from this concept when markets perform as well as they have over the last several years. While it is tempting to want to increase stock market exposure to more fully take advantage when things seem to be going well, remain disciplined in adhering to the risk levels that were laid out during planning. This way, when markets misbehave, we know that the planning work we have done in advance for times like these is putting our clients in the best defensive position to succeed. Bill Belichick would be proud.