Going through the financial planning process should give you conviction in your investment plan. During difficult times conviction is needed to not panic sell.
Conviction comes from belief. Belief comes from understanding. And understanding comes from education, communication and doing the work.
That’s what we mean when we say we lead with planning. Financial planning is the process of aligning your life’s goals with your financial means in the most efficient way possible. It might not seem like it but your monthly cash flow numbers are tied to your portfolio withdrawal rate in retirement. Uncovering and understanding those financial intricacies are what financial planning is all about.
In this blog post we explain why you have to know your numbers and why that **hopefully** furthers your conviction in your investing process.
Why Financial Planning Gives You Conviction
Investing in the stock market is a crucial part of any financial plan. But we can only know the appropriate way to invest once we fully understand your entire financial picture. That’s why we create a personal statement of cash flow and a balance sheet when we get started working with folks. It may seem unnecessary and a lot of work upfront, but doing the work is the best way to build confidence.
We need to know these numbers because, as we say, they drive the bus.
Financial plans are built around cash flow. How much is coming in? How much is going out? That monthly expenditure number is carried forward throughout the entire financial plan. It is built into projections that will help determine the viability of your future wants and needs. It is the biggest factor in making retirement planning decisions.
It also helps us back into how much risk we need to take with the investments. Measuring risk is tricky. We take time horizon and comfort levels into account. But this is more art than science. Adjusting your risk tolerance every time the market drops is a huge no-no. Yes, experience is the only real way to know what it feels like to lose money. But getting more defensive every time stocks fall is a sure fire to not keep pace.
Financial planning comes in here because we’ve done the work ahead of time to figure out how much money you’re going to need from the portfolio each year in retirement. That money will not be at risk in the market. Which can then free you up to have a longer term, hopefully less stressful, view of the stock portion of your portfolio.
Instead of worrying about the money you plan on spending being at risk in the market, it is already properly positioned, which should help alleviate the stress.
Financial planning is really all about taking control of what you can control in the financial world. You can’t control the stock market. And neither can we. You can’t predict the future. And neither can we. But we can control how much we spend. We can control our reactions to the news. We can do the work in order to have confidence in our investing process.
We know that it’s stressful seeing the market swing around 2-3% each day. But volatility, and risk, are the price of admission for long term gains.
That’s why we focus so much on financial planning up front. That’s why we communicate about our process and plans as much as we do. We want all of our clients, and the broader investing public to be armed with as much relevant information as possible.
Communicating the right messages creates understanding of the plan. Understanding the plan creates belief in that plan. And belief that you’re on the right track creates conviction to stick with it when times get tough.