Although financial planners often rely on long-term averages when making capital market assumptions - whether to design a portfolio or create a retirement plan - there is a growing body of research that makes it clear: not all starting points are the same. Even over time horizons as long as 20-30 years or more, investing in high valuation environments tends to lead to below-average returns (and a notable dearth of results significantly above average), and the reverse is true if valuation is low when the investor begins. While many have written about the investment implications of market valuation, my interest is broader - how would it change our financial planning recommendations, beyond just the portfolio composition?
As sayings go, money can't buy love, and the love of money is the root of all evil. They also say that money can't buy happiness, but some interesting recent research shows that actually, financial wealth levels really do affect happiness. However, it only helps if you spend it on the "right" things, and act up front to head off your irrationality.
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Any form of long-term projection is built on the back of assumptions. In the case of a retirement plan, there are several key factors, including portfolio composition (and assumed growth rates), inflation rates, savings, retirement spending, time horizon until retirement, and the duration of retirement. Yet the reality is that not all of these assumptions have equal impact; some are far more dramatic drivers of plan results than others, and which are most important varies by the client situation. In other words, there are assumptions, and there are ASSUMPTIONS! Have you ever examined the sensitivity of your client's financial plan to the assumptions they're using, so you can determine which factors are the most important to focus upon?
In today's skeptical and cynical world, we believe little that we read or are told until we have a chance to try it for ourselves. The car looks great in the magazine, but we have to take it for a test drive. The TV is supposed to be great, but we want to see how the image looks on the screen in the store before we buy. Yet as planners when we deliver financial plans to our clients, we don't just fail to give them a test drive; we actually make it onerous to even try!
In theory, the efficient market is supposed to reward the business that create products and services that improve the lives of their customers, while businesses that create harmful or ineffective solutions generate no income and cease to exist. Industries where the marketplace is too inefficient, and/or where bad products and services can result in public harm, receive some type of regulation to ensure the public good. Given the remarkably inefficient nature of marketplace for advisor education, perhaps it's time for some sort of oversight there, too? :/
In the traditional investment world, it is considered crucial for an active investment manager to stick to their style box. After all, if the manager "drifts" from small cap to large cap, the investor may suddenly find themselves with an under-allocation to small cap, and an excess of large cap, violating their goal of maintaining a well diversified portfolio. Yet there is a growing recognition that for many mutual funds, constraint to a style box may be eliminating the very value that active management was intended to achieve!
