October is Financial Planning Month, but it seems curious that any one month would be sufficient for this topic. Financial planning, after all, is a vital piece of the foundation necessary to support any successful investment strategy.
Some might disagree. On one hand, it could be argued that successful investing is simple. Buy low, sell high. Minimize unnecessary risks. Focus on long-term results, not short-term fluctuations. Avoid emotional decisions.
All of those things will improve your probability of success, but how do you define success as an investor to begin with? That’s where financial planning adds so much value. A good adviser committed to the planning process can help you quantify when to retire. When to begin collecting Social Security. How much you can comfortably spend in retirement. And, of course, how aggressive your investment portfolio should be.
That final point is probably the most significant. Investors are accustomed to thinking that more equity exposure will lead to higher returns. And while history has proved that to be true over the long-term, higher returns also come with increased volatility. There are some cases in which less risk will actually improve your probability for success.
Modern financial planning incorporates statistical modeling, often using Monte Carlo simulations that consider 1,000 different scenarios to determine the mathematical likelihood of a particular result. Such as, for instance, running out of money in retirement. Investing in the stock market offers no guarantees, but using technology and sound planning can help swing the odds in your favor.
Keep in mind, the objective isn’t simply to quantify how aggressive you can be. Rather, it’s to determine the most appropriate asset allocation that will maximize the chances of achieving your goals.
This is especially important after a decadelong bull market. In many cases, portfolios have become more aggressive based on the outperformance of equities, especially compared with bonds and cash. Further, an extended period of a low volatility has conditioned investors to feel more comfortable owning high-risk assets.
As last week showed us, however, that false sense of security can be shattered fast. There’s no such thing as a perfect investment strategy. But there is one that’s most appropriate. What’s yours? That’s a question worth answering, this month and every month.
Ben Marks is chief investment officer at Marks Group Wealth Management in Minnetonka. He can be reached at firstname.lastname@example.org. Brett Angel is a senior wealth adviser at the firm.