Research Director's Monthly Commentary - November 2016

Fall Foliage: Variations on a Theme

Having grown up on the northeast, the autumn season always had a special significance, not just for the pretty foliage but also as a harbinger of change. But what change you ask? Lots: the advent of snow and ski season, "fun" winter driving conditions, the end of mosquito season (!!) to name but a few.

 

So what does this have to do with financial planning? A lot actually. Like the changing leaves in the fall, our lives and life circumstances are constantly changing. From a financial planning perspective, changing life circumstances can (and usually do) result in changing financial prospects that in turn, raise questions about our financial goals (such as retirement, estate planning, or kids’ education goals). A change in job status or health can also result in a change in financial prospects, which can call into question one’s ability to meet financial goals.

The good news is most if not all of the financial planning issues raised by changing life circumstances can be captured in a financial plan. Our work with clients presents myriad differing life circumstances and goals. The tools we use for developing a financial plan (primarily comprehensive planning software) enables us to model a wide range of financial circumstances and goals and probability of achieving these goals. The other bit of good news about the planning process is it goes a long way to putting clients’ fears and anxieties at ease and enables them to move forward more confidently knowing a) they have a financial plan and b) doing something to take charge of their financial prospects through the discipline that a financial plan offers.

Changing prospects for the financial markets are also part of the theme of “change”. We cannot predict the short-term course of the financial markets but we know assumptions about the outlook for financial markets will change. This invariably results in market volatility, which by the way, is one constant for the markets: while we don’t know what the financial markets will do in the short term, we know there will always be volatility in the markets (and sometimes it can get severe, as in a bear market).

 Right now, based on economic fundamentals (i.e. corporate profits, inflation, etc), we think the prospects for the stock market remain favorable. One “little” issue going on now for the markets, is the upcoming presidential election. While we don’t anticipate extreme volatility regardless of who wins, there could certainly be some increased volatility associated with the outcome. We handle portfolio volatility through a) due diligence in research and securities selection in client portfolios and b) employing a diversified investment strategy. This means holding multiple asset classes (e.g. stocks, bonds, international, real estate, natural resources, etc.). Because these asset classes have varying correlations to each other, this helps to dampen portfolio volatility. So while the market may “change” through increased volatility, long-term risk-adjusted return (IMO the most important measure of performance in wealth management) should benefit through the lower volatility of an appropriately diversified portfolio.

 

Bob Toomey, CFA, CFP

Research Director

S.R. Schill & Associates

November 4, 2016