The 10 Things I Got Right in Financial Planning

I wrote an article last month regarding the 10 things I got wrong about financial planning over my 20-year career. As it happens, I also got some things right and was happy when I was asked to write about them. Hopefully, these will benefit your clients.

1. The need versus the willingness to take risk. For most of my clients, I’ve reduced allocations to risky assets such as equities. It wasn’t because I sent them a risk tolerance questionnaire. It was because their need to take risk was low and they didn’t need to risk the consequences of a sustained market plunge.

I tell clients that risk tolerance questionnaires are dangerous for two reasons. The lesser is that everyone’s risk tolerance is not stable and has a high correlation to market performance. The more problematic reason is that they don’t consider one’s need to take risk. As author and advisor William Bernstein puts it, “When you’ve won the game, stop playing.” It turns out that, so far this century, a moderate portfolio that was rebalanced has done as well as an aggressive portfolio. And taking risk off the table made it less hard (still not easy) to rebalance and stick to the plan.

I let clients know that the risk assessment questionnaires I’ve taken tell me I should be between 70% and 140% in stocks. I’m not kidding – one had me with a margin account. I’m sticking with 45% because dying the richest person in the graveyard isn’t the right goal for any of us.

2. Rules over research. There is no shortage of research attempting to show what markets, companies, sectors, styles, interest rates, etc. will do. Many of these forecasts are from academics and economists and present compelling logic – so compelling that they even make me want to abandon my own plan.