Long-term Financial Planning in a Down Market

A long-term financial plan may be an important element in building wealth for retirement. This is visible in the recent increase in marketing campaigns in the financial services industry highlighting financial planning tools. The ability to track progress towards financial goals is an important feature of financial plans for several reasons: 1) it helps to provide direction for overall investment strategy; 2) it serves as a model to compare potential alternatives paths; and 3) it reflects the impact of market volatility, retirement date, income sources, spending goals and life expectancy.

This article will look at financial plans in the context of volatile and down markets and how and when to consider tactical adjustments and other considerations to remain focused on long-term financial goals when these headwinds are present.

Ideally, a financial plan sets out various long-term financial goals and includes the following: 1) a proposed retirement date; 2) an investment strategy that reflects the investor's risk profile; and 3) provisions for market cycles and wealth transfer. The expectation is that long term adherence to the plan will see the investor's assets grow through a positive rate of return and periodic contributions. While financial plans are conceptually hopeful, the fact is that "life happens" and it is important to prepare for all scenarios including periods of market volatility and down markets.

Let's start with the premise that when volatility and down markets occur is exactly when a financial plan becomes most important. From an investment perspective, a plan should be based on a long-term strategy. The immediate concern in a volatile or down market is to consider how the portfolio is positioned considering current market conditions to continue with the long-term strategy. The best course of action is to analyze your current plan and then consider how to stabilize the plan and make the necessary tactical adjustments to position your plan to take advantage of an eventual market recovery. 

At the basic level, financial plans are most impacted by a few general factors: 1) asset growth; 2) retirement date; 3) sources of income during retirement; 4) lifestyle and other goals during retirement; and 5) length of plan. Now let's look at each one of these in more detail. 

Asset growth generally comes from rate of return and contributions. Getting a long-term plan back on track by projecting a higher rate of return sounds nice in theory, but that may come with increased volatility (i.e., risk). Trying to make up for lost assets at the cost of sleepless nights is generally not the best option. Increasing contributions can be an option if the investor has access to excess cashflow or can earn more income. The investor may also cut back on discretionary spending. In periods of volatility and downturns, investors may fear further market declines and want to "get out of the market." Modeling a more conservative model for portfolio growth over the life of the plan is a good exercise before making any such changes. It enables the investor to see what other factors must also change for the plan to have a higher probability of meeting the investor's goals. 

Retirement date effects two variables in the plan. One is the time horizon for investing the retirements assets which not only impacts time to grow, but also the ability to take more risk knowing that there is time to recover from a downturn in the market. Second is the commencement of the period for using those assets. All factors otherwise being equal, an investor who retires at 60 has less time to grow their assets and must also make them last seven years longer than an investor who retires at age 67. Another consideration is transitioning into a period of partial retirement for several years where some employment income continues to be earned.