Your Advisor Should Be Like A Top Doctor

October 27, 2014

Know That An Ounce of Prevention …

There is a reason doctors often say that an ounce of prevention is worth a pound of cure. It’s easier to try to keep a bad thing from happening than it is to fix the bad thing after it has occurred.

Despite the wisdom of this statement, many people don’t schedule regular checkups, be it with their doctor or dentist. Skipping regular checkups can prevent the chance of catching diseases early. Skipping those can lead to an increased risk of landing in the emergency room, or worse.

The same thing can be true of your financial health. Regular checkups with a financial advisor are important if only because the simple passage of time can change your ability and need to take risk. If any of the assumptions underlying your financial plan change, your investment policy statement (IPS) should be altered to adapt.

Life-altering events—such as a birth or death in the family, a marriage or divorce, a large inheritance or a promotion or job loss—can affect the plan in dramatic ways. The impact is frequently seen in your ability, willingness or need to take risk. Thus, your IPS should be reviewed whenever a major life event occurs.

And it’s not just life events that can impact a plan’s assumptions. Even major market movements can lead to significant changes.

For example, if you’ve already accumulated significant financial assets, bull markets—such as the ones we saw in the 1980s and from 1995-1999—that produce greater-than-expected returns mean that you will be ahead of your goals, allowing you to take less risk.

However, bull markets also lower expected future returns, meaning those still far from their goals may have to take more risk. This doesn’t necessarily mean you should take more risk. Alternatives might be to lower your goal, save more or plan on working longer. The reverse is true of bear markets—such as from 2000-2002 and 2008. A good policy is to review your IPS and its assumptions on an annual basis.



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