For the average investor, a short term, sharp decline in the markets and increased volatility can be enough for them to re-engage with their financial adviser and seek advice on moving out of growth assets and into defensive assets. Often, the most common reaction from clients is a desire to liquidate their investments and set aside funds from the sell-off in cash.

While a client’s appetite for risk is assessed through a completed risk profile, before they invest their money, time after time we see the psychology of a client change during a decline in the markets and economy.

What is a Risk Profile and how Does it Work?

A risk profile is an industry standard tool, which varies between Australian Financial Services Licensees, and is designed to identify the amount of risk an investor is willing to accept. Assessing a person’s tolerance to investment risk is a key aspect of portfolio construction and is critical to determining appropriate asset allocation, the recommended investments and expected returns.

Psychology and Emotion

As financial planners we are not experts in psychology, however as subject matter experts in managing clients’ money, through both negative and positive times, we encourage our clients to detach emotionally. We do this by revisiting the client’s original appetite for risk in conjunction with their goals and objectives, i.e. re-visit the client’s journey, why they initially sought advice and what they set out to achieve.

We encourage clients to invest their money in line with their investment time frame into a diversified portfolio of strongly recommended and researched assets. Reacting to market events and attempting to “time the market” is something we do not encourage.

Advice Matters

Instead of making short-term decisions about your investments, a better idea may be to develop and maintain a long-term investment strategy in conjunction with goals and objectives with your adviser. It has been proven through history that kneejerk reactions to sell down underperforming assets may be ill-timed. For example, in 2007 when the global financial crisis started to unfold, the ASX all ordinaries market was at an all-time high of 6,748.90 (October 12th 2007). In March 2009 the market was at its lowest point of 3,145.50 before rebounding in March 2015 where it rose to 5,975.50. Today the market is sitting around 5000 points – sure, it’s not back to its 2007 peak but you’d be kicking yourself now if you’d become impatient and sold at the low in 2009.

If your fund continues to re-invest at lower levels during market down turns, you will be rewarded when the market recovers.

Conclusion

In light of market volatility, I believe clients who seek and pay for ongoing personal advice will be better placed over the long term. Ensuring your portfolio includes an array of different asset classes through diversification is an important strategy to smooth returns over a long investment time frame. Markets will always trade with some level of volatility, but taking this approach helps even out the highs and lows over time.

If you are interested in developing your portfolio and have never sought financial planning advice before, we encourage you to contact the team on 1300 726 132, to make a financial planning appointment. Initial consultations are free and with no obligation. Alternatively, if you are an existing client looking for additional value add advice, please also do not hesitate to contact us to discuss your current situation and future financial plans.

Disclaimer: Shane Light is an Authorised Representative and John Hopkins Financial Services Pty Ltd is a Corporate Representative of WealthSure Financial Services Pty Ltd Level 1 190 Stirling Street PERTH WA 6000 ACN:130 288 578 AFSL: 326450.

General Advice Warning: This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information.

Life is an uncertain game full of peaks and troughs. Financial planning is all about setting up your current position to best take advantage of any opportunity that may arise whilst protecting against any potential downfalls.

It is the process of meeting your life goals and objectives by channelling your finances so you are free to live with a sense of structured freedom.

When you picture your financial independence, what do you see? Enjoying life to the fullest, having successfully secured your family’s needs? Seeing the world? Working on a cause you are passionate about? Financial planning can help you best achieve your idea of complete nirvana from all your financial worries, so you can best position yourself and potentially attain peace of mind in the process.

Carefully planning you finances can set you up for the long term, yet time and time again many individuals don’t seek financial planning advice until they reach a later stage in their life, often not even until pre-retirement age.

As a financial planner, the best advice I can give is to not put off something so important until you are nearing retirement age; start now!

Financial planning is a systematic process. It doesn’t follow a random path. One size doesn’t fit all. It is a step-by-step process designed to help you evaluate your financial position, goals and aspirations through a carefully constructed financial plan. Financial planning involves calculating the pros and cons of a situation, which can be exhausting if professional guidance is not taken.

There are many mistakes individuals can make when trying to sort out their finances without seeking appropriate advice. Below, I have outlined my top five avoidable mistakes investors can make whilst doing their financial planning:

1. Ignoring Inflation:

To put it simply, inflation is a ‘cost’ we all pay. It is well known that most company’s incorporate annual income increases for employees year after year to coincide with inflation, however what people tend to skim over is the simultaneous rise in expenses too. If ignored, inflation will see your savings deplete leaving little surplus for goals. If you only account for expenses as being “static” (expenses not increasing in value due to inflation), then your anticipated savings will be unrealistic. This paints an incorrect picture about the ability to reach goals due to inflated savings. Hence investors should always incorporate a reasonable rate of inflation whilst planning their financial goals.

2. Clarity of Goals:

We all have multiple goals we want to fulfil in life, be it children’s education, wedding, buying a property, travel or retirement. Whilst most people have some idea about roughly how much money will be needed to achieve each goal, most often than not we fail to put them on paper. Quantifying every goal and adjusting them for inflation helps in determining the savings that will be required in each circumstance. This ensures an asset allocation that is in tune with your individual risk profile and investment goals.

It’s vital you are 100% honest and clear with your financial planner in terms of the clarity of your goals, so they can construct the best plan in line with your objectives.

3. Not planning for contingencies:

Every person should have a Plan B. Whether it’s a cash buffer, exit plan, insurance or defensive investments – something should be considered. Events or circumstances such as temporary disability, loss of job or any other situation could potentially put your income at risk. A common strategy amongst investors is to set aside some money into liquid assets (such as money in a savings account) which can be easily withdrawn in a time of emergency. This fund should not be used for discretionary expenses (like a holiday or luxury purchase).

4. Inadequate Insurance:

A life insurance policy will help the family tide over the loss of income of a deceased individual, or other insured event. Although the loss of the individual cannot be replaced, having sufficient insurance in place can safeguard the family against monetary problems. While a financial planner can advise you on the level of insurance cover you should have, generally this amount takes into account your current debt levels, income, dependents and estate planning needs.

5. Unrealistic Assumptions:

Financial planning is essentially a projection of your future based on certain assumptions, such as life expectancy, rate of return on assets, rate of inflation, etc. Investors generally tend to be over confident when it comes to expected returns from equity and debt. Similarly, life expectancy and inflation assumptions are often inaccurate. Unrealistic assumptions result in unrealistic planning, which can have significant implications.

Whatever your goals or objectives, it’s important you take the time to review all aspects of your financial situation and find an experienced financial planner who you trust and get along well with.

Remember, it’s never too early to put an appropriate financial plan in place. Don’t fall into the trap of making the same mistakes others have made; your financial future is simply too important.

For more information on putting together a financial strategy, or for any queries in relation to financial planning, please feel free to call our office on 1300 726 082 and ask to speak with a financial planner who will be able to assist.