As part of our role as financial planners, we provide investment management services to our clients. Managing investments requires the same fiduciary responsibility toward our clients as would any other aspect of a financial plan or planning service. An important aspect of our due diligence as it pertains to investment management is our quarterly investment strategy meetings. At these meetings, we review factors that are important in making sound investment decisions such as reviews of the outlook for the economy, interest rates, Federal Reserve policy, corporate earnings, market valuation, and geopolitical events, among many other factors.
At our most recent quarterly investment meeting, we actually increased slightly our average allocation toward stocks while maintaining fixed income allocations. Although we expect financial market volatility will remain elevated for some time, we think the outlook for U.S. stocks remains, on balance, positive based on a strong economy, strong corporate earnings, and continued investor demand for higher return assets such as stocks.
While the Federal Reserve is raising interest rates, we do not expect that the pace of increases will blunt demand for stocks. We would also note that over the past 10 Fed rate hike cycles going back to 1954, the stock market rose in eight of those cycles and by an average of about 21%. So we don’t view Fed policy as a major risk. However, we do see uncertainty over the war in Ukraine and the potential for sustained high inflation as being higher risks at the present time.
So, why are investments important in the financial planning process? In a nutshell, we believe managing client investments and maintaining a deeper understanding of the markets can lead to better planning outcomes for clients. There are several reasons for this belief. Every comprehensive financial plan incorporates rate of return assumptions for the client’s investment assets. We believe having a deeper understanding of the markets and return potential helps us as planners provide better investment return assumptions.
Another important reason why investments are important in the planning process is that it allows the planner to enhance implementation of the plan. Our history shows that managing client investments as part of their plan greatly increases the probability of the plan actually being implemented and succeeding. Risk management is another important element of a planner’s responsibility as a fiduciary and to improve the likelihood of success for the client. This includes not only the logic and assumptions included in a financial plan but also selecting an investment strategy for the client that will maximize the probability of success. This encompasses both the “growth” element of a client’s investments and potential volatility of the investments.
Depending on a client’s age, goals, and risk tolerance, we aim to select an investment strategy that enables the client to meet the goals of his or her plan while also maintaining a lower risk profile for the portfolio.
Robert Toomey, CFA/CFP, is Vice President of Research for S. R. Schill & Associates on Mercer Island.