Overheard in Dublin (in a Financial Planners Office)

I want to do a Financial Plan but first I have to get the mortgage down to an acceptable level

If you feel that your finances aren’t structured optimally then now is the time to undertake Financial Planning. Now is the time when your financial planner will have the most options available to him/her. If the actions you take yourself aren’t optimal, it is likely that there will be less for your planner to work with.

I want to do a Financial Plan but I have a lot of expense in the next 12 months. I’ll come back to you after I get over that

Many people live a kind of hand to mouth existence where rather than planning in advance, they find the money they need for large expenditures from a combination of cashflow, savings and borrowings. This is the most expensive way to live. If you plan in advance you can use the returns available from investing in the stock market to reduce your input to funding your objectives. You never have to bear the interest cost of ‘bad’ debt (high interest loans especially those that fund something that doesn’t earn a return for you), and the longer term will reduce investment risk. This will save you money and increase your net worth.

I know I have too much cash on deposit but I need it to convert the attic and put the kids through college

Inflation is a silent killer. Current low interest rates mean that low or often no interest deposits are destroying wealth. €500,000 left in a non-interest bearing account for 5 years during a period of 2% inflation results in a reduction in value to €452,865 in present day terms. People often choose this option because the loss isn’t visible to them (there’s still €500,000 in the account when they check it five years later) and they value certainty. The only thing certain about this strategy is that it will result in certain losses.

I’m focusing on accelerating repayment of our mortgage

Debt (good debt) is not the enemy. If you knew that your investments were always going to succeed, then the right thing to do every time would be to borrow and invest more. This is a fact. You will rarely see a business which has no borrowings, for a number of reasons, not least of which is that leverage increases return. It also increases risk so, as with a lot of things, the answer is somewhere in the middle; the correct amount of leverage is the optimal strategy, for a business and for individuals. In a low interest rate environment it makes even more sense to carry some debt, as long as it is the right type of debt for the right purpose, as your surplus income is better served being invested over the long term in a targeted manner, to reduce the cost of your objectives.

I had a pension but it performed so badly during the last recession that I cancelled it

History has shown us that private investors, for the most part, tend to make precisely the wrong moves at critical times in the investment cycle. Excessive optimism, or as Alan Greenspan called it, ‘irrational exhuberance’ caused many investors to flood into risk assets in 2006/2007 immediately prior to the last market correction, and switch out of risk assets to cash as that crisis deepened from 2008-2010. In hindsight the opposite strategy would have paid huge dividends. One way to avoid making these very human and understandable mistakes is to learn about behavioural finance or take advice from a Financial Planner who sees behavioural finance at work every day.

I need a Financial Planner to help me invest in <insert single asset class here>

Approaching an investment adviser and telling him or her that you want to invest in a particular asset class is like telling your doctor what drug you need. Proper investing doesn’t work that way. Investing any significant proportion of your wealth in one thing is not investing at all, it is speculation. Often when an investor suffers an adverse result, it is because they came at the task this way, by trying to make as much return as possible from one type of investment with little regard for the risks involved. It is possible to optimize risk adjusted returns by diversifying across assets which are lowly correlated (where the returns don’t move in the same direction). This may allow you to achieve the return you need, with less risk.

I need Financial Advice

This is very unlikely. Financial advice (the sale of financial products) is being handed out for free on every street corner. It is very likely that what you need Financial Planning. If after you undertake Financial Planning you need a product, and only if you actually need a product, we can do that for you, but the planning comes first.

I can’t afford a Financial Plan

The gap between what is optimum for clients and what most clients have is so wide that I have yet to meet a client who doesn’t feel that they are better off after engaging in the process of Financial Planning. A good financial plan, properly constructed and implemented, will save you or make you, a multiple of the cost. You can’t afford not to get one.

If you would like to explore whether you could benefit from Financial Planning, please contact us on 01 546 1100, by email to [email protected] or use the Live Chat facility in the bottom right corner of the screen.

The material and information contained on this website is for general information purposes only. Neither the writer nor Highfield Financial Planning Ltd makes any warranty as to the completeness, accuracy or reliability of the information or the suitability or availability of products or services, referred to on the website, for any purpose. You should not rely on any information contained on this website as a basis for making any financial, legal, taxation or other decision.

© Highfield Financial Planning 18 June 2020

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