Monday, May 10, 2010

Another Example of How Financial Plans Prevent Mistakes and Reduce Heartburn

Most financial advisors had a long, rough day last Thursday. Their phones rang off the hook with clients calling in a panic, anxious to sell their positions, looking for information, and hoping for reassurance. Of course, that was the day the DOW dropped 1,000 points in less than twenty minutes.

Counter to what you would expect, it was fairly quite around the Net Worth Advisory Group office that afternoon. Why? Each and every one of our clients has a comprehensive financial plan built specifically for their situation. Included in the financial plan is an investment policy statement (IPS), which outlines the client's investment strategy with an emphasis on the long-term.

In the Net Worth office, financial planners and their clients frequently review their IPS statements to keep the focus on the ultimate goal. Our clients know that if they are to reach their long term financial goals, it won’t have anything to do with what is going on in Greece this week, or whether someone on a trading desk made a gigantic trade error. All that stuff is nearly irrelevant to long-term retirement planning. What is relevant is that the client's allocation reflects where they are in life, and they know what they need to be doing to reach their financial goals.

The discipline provided by having a financial plan saves our clients a large amount of stress, and prevents them from making decisions that would negatively affect their long-term well-being. Without a financial plan, many investors might panic and rush to sell after the market had declined significantly. This would have caused the investor to miss the 700-point correction immediately following the market pullback.

The focus on the end goal provided by their financial plan enabled our clients to still enjoy their lunch last Thursday. Personally, I didn't have a single client call anxious to sell their equities and move to cash. If I had my response would have been:

"You are the client, and I will do what you ask. However, think back on all the conversations we've had revolving around your financial plan and your long-term investment goals, and how we have been emotionally preparing for these types of market pullbacks. Read through your financial plan and call me back if you still want to sell."

I'm confident my phone would have been silent for the rest of the day.

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