Research Director Monthly Commentary: January 2016

Deep Powder

 

Over New Year’s I was skiing with my family in the Washington Cascades in some of the best snow conditions I can ever remember: 170 inches of deep, soft powder….so deep you could stick your ski pole into the snow and it would not stop going down…down. As you might imagine, ski conditions were fantastic.  

We did some off trail skiing into what some might refer to as “backcountry”. To get there, we had to traverse through forested areas with cliffs, shelfs, and drop offs. One thing that occurred me trekking out in this was the “problem” one might have if one “slid” off the trail and head-planted into this deep, deep powder…..it could be potentially deadly because it would be so hard to get out of on your own.

So what does this have to do with financial planning? Two words: “risk management”.  Just as in investing, off-trail skiing has certain risks you don’t find when skiing the “groomers”. Risks include getting lost, getting injured far from help, hidden obstacles under the snow like rocks and fallen trees, or ironically, snow that is SO beautiful it has a seductive charm that can lead to a problem, such as a deep fall from which extraction is quite difficult.

We can take precautions to manage risk while skiing in the backcountry that improve our odds of success: don’t ski alone; carry a GPS device; carry safety equipment that may help you “dig out”; if you don’t know the area, go with someone who does; and most of all, know your limitations and abilities.  

Just as in backcountry skiing, there are precautions we can take to manage personal financial risk through financial planning.  One element of this involves preparation. Preparation comes in the form of information gathering, organizing one’s financial affairs, and setting goals as part of a plan. A good financial plan provides discipline which helps reduce risk by adhering to the goals of the plan, such as budgeting or savings goals, tax or estate goals, and discipline in investing. A formal investment plan, and the discipline to stick with the plan for the long term, can significantly improve the likelihood of achieving your financial goals.

Having a sound financial plan is like skiing on a trail you know is secure, it provides a rational roadmap to keep you on course with your financial and life goals and reduces the risk of a “headplant”. It’s also about knowing what you don’t know….if you are skiing backcountry, it is important to know about snow conditions, terrain, or how to find your way back down safely. The analogy to financial planning is guessing or not knowing if your financial plan is appropriate can increase personal financial risks and cause one to fall short of his/her goals. And it is important to be honest with yourself: if you truly do not understand your financial roadmap or how your investments can work better for you, seek the counsel of an advisor you trust.

Bob Toomey

Research Director

S.R. Schill & Associates