Hannah Boundy, CFA®, CFP®
The Evolution of Your Financial Plan
Updated: May 7, 2020
At Sherwood FP, we take a very planning centric approach to investing. We do this for several reasons. One is because it’s simply the best approach for our clients. Having a plan reduces stress and anxiety caused by financial uncertainty. It helps our clients answer questions like when to retire and how much they can spend on a new home or a wedding for a child. It also provides a path forward when it comes to saving for various financial goals and helps inform how we invest our client’s assets in a major way. In the past, investing was often driven by returns and many investors still operate this way – investing for the greatest hypothetical returns with little regard to the associated risks. When we begin to take planning into account however, we start to see how taking on excessive risk for the sake of chasing returns can cause major problems when it comes to meeting our financial goals. For instance, an investment generating 30%+ returns may look attractive initially, but if that same investment routinely experiences 50% drops, it could be incredibly harmful to someone planning on retiring in the next few years who will need to rely on the stability of their portfolio. All this to say, planning is important. And if planning is so important, then the assumptions we use and our ability to create dynamic plans that fluctuate with our changing economy and personal situations is also important.
I was recently reviewing the assumptions used by our financial planning software and came across a great statement by the planner who helps make them. He says, “practitioners should not treat long term planning as an exact science with a focus on the accuracy to the second decimal place but rather as (an) educated art designed to provide reasonable guidelines in assisting clients (to) plan their future.” He goes on to say, “long term planning is not a case of plan and forget but rather plan, monitor and modify as necessary.” I find this to be an incredibly helpful description of how dynamic financial planning should be when done well. It’s tempting to treat planning as a “one and done” process. You put together a plan at the beginning, see if it works, and if it does, go on your merry way. The problem is that plans consist of literally hundreds of variables and even just a minor change in one can have a huge impact on the plan. For instance, altering inflation assumptions by an increase of .25% can cause some previously optimistic plans to suddenly become dire. Likewise, spending $10,000 less each year in retirement may mean the difference between retiring now or in several more years. These variables matter which is why it’s important that we remain very diligent about the assumptions we use from the beginning to make sure that they align with reality, but also that we take the time to update the plan periodically to make sure that not only are our economic assumption aligning with reality but also that the personal variables we’re using for each client also reflect their actual situation.
For this reason, here at Sherwood Financial Partners, we’re committed to checking in with our clients regularly and updating their plans when needed to make sure that as our economy and their situation evolve, that their plan does as well. If you’d like to learn more about our process, we’d love to speak with you. You can request a meeting or contact us with questions by clicking here.