Financial Success: Raise the Bar

My parents are blessed to live in the great state of Montana, which allows our family to fly fish some of the best rivers in the world. We love it – it has long been a family event, passed down from generation to generation. Our excitement begins the night before any trip by plotting out promising boat float routes along the river. During this planning phase, we stare at the map and say things like “this area looks good” or “this water might produce fish.”  Never a negative comment, always positive as we are on high emotion for the next day’s adventure.

Almost always, when the fishing trip arrives, we are met with something that we did not plan for.  This can be something simple as checking the weather during the planning process (somehow, that task is always overlooked!) or something uncontrollable such as the number of other boats looking to fish our same water. Our family has all learned that our fishing excursions rarely go exactly as planned.  

My younger brother has the most experience out of all of us, and everyone looks to him as the one to help save the day when an issue arises. He knows the gear, weather patterns, river locations, and how to handle other ‘unruly’ fisherman we encounter on the river. In other words, he knows the structure better than anyone and works hard to help everyone achieve the outcome of catching fish.  

Like fly fishing, financial planning under a multi-family office model instills excitement in both the household and advisor once the plan is laid out. Collaboration of a client’s goals and priorities, coupled with an advisor’s expertise, can create something that both parties can stand firmly behind. We all want to achieve a life we envision. While most people may not be able to articulate this, I believe clients desire to create a holistic financial structure designed to address a household’s defined life priorities and desired outcomes. Sounds great, right?

Unfortunately, this rarely takes place between an advisor and a household. Conversations between client and advisor are centered around returns within a portfolio and are recycled on some sort of quarterly or semi-annual basis. Performance of the investments seems to be the key factor in deciding the success of the relationship. While this performance is no doubt an important factor within any financial plan – this as a sole barometer of success is not enough for a household to be satisfied with.  

Think about it – all households have goals. Obvious goals that are usually easy to identify are future home purchases, kid’s education, and retirement. Less obvious goals are usually centered around something personal – such as blessing a loved one with a relief payment of medical bills or debt. If an advisor does not know these goals and priorities intimately, the household runs the risk of these outcomes not coming to fruition.  

Most of us remember how the stock market plummeted in March of 2020. At its low point, the S&P 500 closed on March 23rd at $2,237, a far cry from the high of $3,386 on February 19th!  

What if you were invested in the S&P 500, and you were planning on purchasing a car in the summer of 2020? Paying off student debt? Or maybe you were saving for a down payment on a home? All those goals were likely put on hold if success of your financial plan was centered around the performance of your portfolio. Again – the measure of success is simply not high enough.

A couple of weeks ago – we posed questions as to how success should be defined between a household and an advisor. I want to expand on two of those questions, as I believe it will help us solve our defined issue:

(1) Do our investments reflect our needs?

Your future priorities, or future cash liabilities, should be matched to the appropriate investment. The technical phrase we like to use for this framework is called “Liabilities Driven Investments.” If the student loans, auto purchase, or down payment mentioned above were appropriately planned for, funds for those purchases should have never been subjected to the risk of the stock market. Since those priorities were to be accomplished in 2020 as defined by the client, the funds should have been invested in assets with extremely low risk to have a higher likelihood of achieving that outcome.

(2) Are we protected?

Nobody can predict the future, that much we can agree on. The public stock market is volatile, which creates risk and reward. We are rewarded for increases in the stock prices, but this reward does not come without the risk. Simply put, risk and reward are correlated – an investor is rewarded for the risk he or she is willing to take over time.  

What allows us to take this risk? Again – this question leads us to the necessity of a liabilities-driven approach and a fundamental understanding of the household’s goals. We all want to buy low and sell high with our investments – it’s the name of the game. Time wins here – and we as investors only get the benefit of time through a creation of a holistic financial structure. Before taking on the risk of the stock market, we must look to protect our basic spending needs for a specific period. Households should work to set aside 1-3 years of lifestyle expenses, based on individual liquidity needs. These funds are what I like to call a household’s protective reserve – and allow the household to be rewarded for the volatility of the stock market.  

Remember the stats above about the S&P 500? As of 11/19/2020, the S&P closed at $3,582 and is positive for the year to date. If a household had to sell their investments to fund lifestyle expenses in early 2020, all of these gains would have been missed. Nobody can time the public stock market – but by having an adequate protective reserve, a household has a higher ability to withstand the volatility of stock prices that 2020 has presented us.

Conclusion:

When choosing a financial advisor, the most effective route to take is not always clear. Complex jargon, fancy presentations, and overwhelming information complicates the situation. It is difficult to know everything to plan or look for – I can attest to that through many a fly fishing trip!  

One bit of advice: do not forget you have priorities, goals, and outcomes you want to accomplish. You deserve a customized and unique financial structure to achieve your life envisioned. Eliminate the noise and partner with a firm that provides expert comprehensive wealth management to help create a higher level of success.