Financial Goal Planning

If one advances confidently in the direction of his dreams, and endeavors to live the life he has imagined, he will meet with a success unexpected in common hours. – Henry David Thoreau

The main decision of asset allocation specific to goals is to set the minimum risk level necessary to have sufficient confidence for the goals one is attempting to fund, regardless of whether the client can “tolerate” more risk or may achieve a potentially higher rate of return but yet potentially less wealth. Despite high initial odds, the odds of the markets behaving in a manner that would not cause an advisor to change his advice are near zero. Yet in many cases, investors are told not to make any changes. “Funded status” is unique to each individual’s cash flows and risk capacity and in reality there will be many more changes to the original asset allocations.

The notion of identifying the risk, or “pain” that one can bear and then designing an asset allocation that is designed to actually experience that risk seems to be an absurd behavior, but it is standard. No one would rationally accept more pain (risk) merely because they can tolerate it if one can confidently funds the goals they personally value with a lower risk asset allocation.

Planning includes changing savings rates, spending rates, asset allocations, shrinking, delaying or freezing goals, distribution strategies, and management. Dollar weighted return is what determines wealth outcome that is unique to each client’s situation of unique cash flows

Typically, Monte Carlo “odds of success” never pay attention to what is happening to the client’s funded status over the entire planning horizon. Odds of success assume no changes. Typical cash flow analysis has static tax rate, even rate of return, and even spending patterns. The reality is there are always changes. Sequence of returns change. Distribution patterns changes. Taxes change. Markets are unpredictable.

Portfolios are typically compared to performance benchmarks, underlying markets for which are unpredictable. An advisor can make investment choices, allocations, and policy changes. Clients control their budgets and revenue. The place for the most meaningful interchange between client and adviser is in understanding goals, cash needs, spending patterns, and to subsequently manage distributions in order to help minimize “depletion risk.” The investment process changes from investing to beat an investment benchmark to managing confidence levels for each goal that is set.