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  • Writer's pictureAkshay Nayak

The Plan Drives The Decisions

Within the exercise of financial advisory, investment decisions recieve the most attention. Investors judge the effectiveness of their financial plans based on the investment actions recommended to them. Advisory regulations too tend to overly focus on this aspect. But investment actions should not receive more attention than the financial plan itself. An effective financial plan takes a holistic view of the individual's life. It adapts to changes in the individual's career and life circumstances. Financial planning is therefore the actual crux of financial advisory.

The financial plan significantly impacts the individual's chances of achieving their goals and creating wealth. Investment actions only facilitate the execution of the wider financial plan. So we must consider the process oriented aspects of each of our financial goals first. Only then will our investment decisions be effective. And today I am going to show why and how this is the case. I will do this by looking at the process behind achieving major financial goals that most of us have. Let us begin by looking at essential long term goals such as retirement and funding education.

Both these goals are ideally planned for over a span of decades. The process of planning for these goals must be dynamic and adaptive. Financial plans for such goals must begin with setting an estimated target corpus for the goal. In the case of retirement planning, the starting point is the individual's current expenses. When planning for higher education, the current cost of a particular course becomes the starting point. Both these amounts then have to be adjusted for inflation. The inflation rate used for calculations must be based on the most realistic estimate possible.

Other factors such as annual increase in investments, lumpsum amounts such as bonuses also have to be considered. The plan must be adapted to meet changes in our needs along the way to the goal. It must be aligned to the individual's risk profile. Potential real world that are relevant to the individual must be identified and provided for. Only then would investment decisions like asset allocation, product choices, frequency of rebalancing and reducing the equity allocation be relevant. A similar process would apply to planning for short term goals.

Most short term goals tend to be aspirational in nature. Purchasing a new home or vehicle are examples of such goals. Funding a vacation also comes under this category. All these goals involve significant cost outlays. And such spending usually has to happen in one shot. Spending for short term goals without a plan can impact savings for important long term goals. Therefore short term and long term goals have to be prioritised appropriately. This would allow short term goals to be achieved in parallel with long term goals. There would be no need to compromise one for the other.

Spending for short term goals without proper planning can have another dangerous consequence. It may see individuals fund such goals through debt. Such a decision can adversely affect the financial health of the individual.

Having a plan in place allows individuals to save adequately before spending. This allows them to fund short term goals from their own pockets comfortably. Financial planning is no less important for those creating a legacy wealth corpus. In fact, financial planning needs would change as the corpus grows. The initial portion of the corpus would require a basic financial plan. The amount may be achieved through sustained investment discipline. But as the corpus grows, more nuanced aspects of financial planning come into play.

At this point financial planning needs to become a lot more strategic. The plan must preserve existing wealth while also growing it further. Diversification within asset classes would need to become sharper. The variety of products within each asset class may need to improve. An estate plan would have to be developed. It would ensure timely transmission of wealth to the right parties. After a point, philanthropic interests of the individual can be considered. Ineffective financial planning would not allow any of these objectives to be achieved.

Investment decision making is definitely a thrilling exercise. But it cannot replace effective financial planning. Our financial plan sets the ideal course for us. Investment decisions only enable us to move along that course. Investment decisions made without an underlying plan would therefore be aimless. Effective financial planning allows us to strategise the achievement of our goals. It allows us to strategise the exercise of wealth creation. It clearly indicates the timing and nature of investment actions required. Our investment decisions should only be viewed as a part of our financial plan. It is ultimately our financial plans that drive our investment decisions.

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