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A good structural financial plan can weather any financial storm

Supply-chain issues, the Russia-Ukraine conflict, a tech selloff, cost-of-living crisis and 10%+ inflation… It’s been an interesting six months or so. George Davey explains why a structured financial plan is vital in a volatile world.

| 8 min read

For ten years plus after the financial crash, markets could do little wrong – and, when they did, they recovered quickly. There are a range of reasons for these quick recoveries, such as the artificially low interest rates in many economies and general positive market sentiment. There are, however, question marks around how long it will take markets to recover from the downturn of the past seven or so months – and it has economists looking back to the pre-1970s for comparable conditions to learn from.

One thing that is clear is that we are not expecting the sharp recovery that we saw at the beginning of the Covid-19 pandemic and in other times of market volatility over the past ten years – but how long will it take and have we seen the worst yet?

It is not the cheeriest start to an article but, given recent news cycles, I’m sure there have been worse. The reality is that it is easy to get preoccupied with markets and the droning of the media about the doom and gloom of recent performance. The fact of the matter is that we have been here before, maybe not in exactly the same place or for exactly the same reasons, but what we can say is things will get better and markets will recover. The big question is just how long it will take.

Managing the unpredictable

With market movements being one thing that we are unable to control or predict, it is important to understand risk and how this can affect our plans. This makes perfect sense in theory – but how do we manage it in practice?

Risk is typically broken down into three main areas when considering financial planning:

  • Attitude to risk
  • Capacity for loss
  • Time horizon

Attitude to risk is assessed through a mix of detailed questioning and subsequent discussions with a client. Capacity for loss is a number-based assessment of a client's actual ability to sustain losses on liquid assets whilst being able to meet their objectives. Time horizon relates to the length of time that an investment or portfolio is expected to be held for before being accessed. Essentially, the longer the time horizon, the greater the ability to weather short-term volatility.

If at the outset, when arranging your finances, a clear assessment of these three areas of risk is carried out then, in theory, a portfolio and financial plan should be managed with this front and centre. In having a clear understanding of the level of risk that is able to be taken, short-term volatility should not be hugely damaging to an overall strategy. However, if this has not been done, the damage is potentially catastrophic.

With market movements being one thing that we are unable to control or predict, it is important to understand risk and how this can affect our plans. This makes perfect sense in theory – but how do we manage it in practice?

There are various studies looking into the impact of sharp market declines at various stages in a client’s life, and the impact that this can have on achieving objectives. It is a fact that a 20%, 30% or 50% drop in the value of investments requires subsequent returns of 25%, 43% and 100% respectively to be back in the same position again. Therefore, very simplistically, the closer you are to needing to call on an asset, the lower the level of risk can be justified.

Gains required to make up for loss

It is times like these that it is very easy to justify why any good financial planner has advised what they likely have over the past decade in terms of asset and investment structuring. It has, however, been much harder until recently to explain to a low-risk client that 5% or 6% returns are very good given their risk profile when they have a friend in the pub who had seen consecutive years of 10%-plus returns with seemingly little risk due to market conditions, but with a very different risk profile. As we have seen in the past, you can reap the rewards of good, structured financial planning.

How do we do this?

Anyone that knows anything about investing knows how important diversification is. Not everybody knows or appreciates that diversification spans outside of investments to where assets are held – the structural financial plan.

Assets (by type)

Asset Summary

What is structural financial planning?

Forgetting investments for a minute, any good financial plan includes the use of various tax wrappers (or structures) such as pensions, ISAs, general investment accounts (GIAs) and, depending on the level of wealth and client circumstances, offshore bonds (the list can go on as the numbers increase). The planning element comes into how funds are deployed across such structures and close management of this is key – diversification.

Why does a good structural plan matter?

Pensions, ISAs, GIAs and offshore bonds all have different access constraints and tax advantages. As such, we can take varying levels of investment risk where access constraints mean that funds will be invested for longer or shorter periods of time and with different tax treatments.

The overall focus and aim of a good, structural financial plan is that you have funds in the right wrappers, taking the right level of risk in order to allow the lifestyle that you desire. We use cash flow modelling to help design and test this. It’s essentially software that we can drop in all data we have on a client’s financial position, plus any likely changes over their lifetime, building into any life events along the way. This helps to make a financial plan visual and relatable outside of the theory and recommendations that we provide.

...short-term volatility, whilst noteworthy, should not be a source of stress and distress.

A structural financial plan, especially when designed in tandem with a dedicated investment manager, brings freedom and peace of mind. This comes both in terms of having the funds you need when you need them and being able to trust that the funds that you don’t currently need are invested correctly and in the right environment for the future. Therefore, short-term volatility, whilst noteworthy, should not be a source of stress and distress. One of the main benefits of a financial plan is the comfort that your arrangements are set up to weather the storm and your lifestyle can continue unaffected.

Secondly, a good structural financial plan will maximise the tax efficiency of your growth and development assets - and also draw upon them. The ideas and theory about this are interesting and complex enough to focus on in another article. However, the job of a financial planner is to make these clear and easy to understand as possible and as uncomplex, but effective as they can be.

Whilst market movements and recent news cycles can be troubling, a well-managed financial plan that focuses on an effective structural composition and risk management can help you manage those money concerns. The reality is, however, that a good plan must be put in place as early as possible to mitigate the short-term risks of market volatility.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

A good structural financial plan can weather any financial storm

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