This lull in market volatility provides a good opportunity to step back and look at the bigger picture…. the importance of a financial plan.

There are so many important financial decisions and questions that can be shaped and answered by a robust plan. It does far more than simply helping determine if you’ll be able to retire when you want and how you want.

But, today, let me focus on just one interesting example of how a robust plan can help you make better investment decisions and increase your probability of remaining financially independent in a variety of market environments.

Below is a screenshot from the results section of a new client’s financial plan. The left “meter” reflects the result of my recommended scenario while the right “meter” reflects the probability of an alternate scenario.


Every client has different scenarios based on their unique circumstances. In this particular case, the recommended scenario on the left assumes a conservative portfolio (just 30% in stocks) from now until retirement (2021). At that point, our plan is to actually make the portfolio more aggressive (60% in stocks).

The right, alternate scenario assumes a moderately aggressive (60% stocks) approach all the way through. This is a more common, “traditional” approach to portfolio management and is representative of how most folks at this stage would be invested. You’ll notice it even has a higher probability (91%) than my recommended scenario (89%). So why am I recommending the more conservative approach if the probability of success is actually lower?

I’m glad you asked.

A robust plan tests for adverse events to identify potential threats to a family’s financial independence. One way in which I stress clients’ financial projections is to simulate a bear market.

The bear market stress test helps us understand how a bear market could impact a client’s financial independence based on their unique circumstances and portfolio strategy.

The bear market stress test is especially critical at this point in time because we’re likely late-cycle and due for a bear market (if not already in a bear market).

Below is the result of the bear market stress test for the Recommended scenario. 84% is still well within my comfort zone. If we could maintain an 84% probability of success even after a severe bear market, I’d be extremely pleased.






How about the bear market stress test of the alternate, more traditional scenario? The result is far worse with just a 53% probability of success after a severe bear market.






What we’re seeing here is that if we simply went with the traditional approach to portfolio management this client would unknowingly be jeopardizing their financial independence. All for what? To eek out a few more percent over the next several years? This is why rules-of-thumb when it comes to investing are so dangerous!

There is actually a term for this concept called “Sequence of Returns Risk.” I’ve written about this previously. The idea is that investors tend to be most vulnerable to market declines in the five years leading up to retirement and the first 7-10 years of retirement.

For example, imagine losing 30% of your portfolio in the first year of retirement. For many people, that loss would have a HUGE impact on their retirement.

Many investors nearing retirement, or early in their retirement years, need to be concerned about large losses because they have such a large impact during those years than any other year in their lifetime! There is just not enough time to make up those losses.

Note: In this client’s case, we wouldn’t wait until retirement to make the portfolio more aggressive if a bear market were to start in the next year or two. We’d pull that strategic shift forward to the depths of the bear market in an effort to take full advantage of the recovery upswing. Conversely, if a bear market doesn’t materialize by retirement we would wait to make the portfolio more aggressive. In other words, there is no hard date for making the portfolio more aggressive!

The point here is to preserve and protect a client’s financial independence across a variety of market environments. It does no good to plan only for a “goldilocks” scenario.

After all, you’ve worked so hard and sacrificed so much throughout your life to put yourself in this position, and build up their nest egg. My job, now, is to help you preserve your retirement goals.

You only get one shot at living the life of which you’ve dreamt. Don’t let it slip through your fingers when already in your grasp.


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