You no doubt know that I am a big believer in Financial Planning as the foundation for everything to do with money for my clients. KNOWING where the money is flowing can make navigating the uncertain future a lot simpler. It is like white water rafting. If you know how the river flows and where the big obstacles are you can usually make it down the rapids sprayed with water but still in the boat. However, you still need the boat to get you past the rolling and roiling rapids and that is the role of a proper asset allocation for your portfolio.
Asset allocation is, simply, the optimal mix of cash, fixed income and equity investments to help meet your financial goals. Some rafts have wider sides for safety just like some asset allocations have more cash for safety. The mix you choose is irrelevant as long as it is built to accomplish two things;
- Can it help you reach your goals in the financial plan? and,
- Can you stay in the boat?
The first one is the part we, as Advisors, focus on a bit too much. Reaching your client’s goals is really important because it is often how we are judged by clients. I can do great work on a financial plan for a client but if I am not hitting the targets on the plan then the financial plan’s importance is diminished.
The second thing is why we get paid. This is a huge difference and important to understand. A river rafting guide is responsible for taking a group of people, with varying skill levels, down the river. Everyone should get wet, scream with a mix of terror and joy and be happy at the end so they will tell their friends about the great rafting guide. The guide, on the other-hand, is thinking about making sure everyone finishes the run inside the boat. Too many people out of the boat and they have serious trouble. Every rafting company has a safety team stationed nearby as a precautionary measure for when the plan goes off course. In reality, any idiot can jump in a raft and ride down the Ottawa River. It’s that you can exit safely at the end that is all the value provided by the guide.
How does this lead back to Asset Allocation? Asset Allocation is the raft and paddles and life jackets you use to shoot the rapids of the financial markets. If your plan is a gentle Cat 1 rapid run then you can probably get away with 2 of the 3 items. If your plan has you running the Stein River’s famous Cat 5 rapids well you better have everything, just in case. The raft guide {Editor: That’s Sam!) uses all the tools available to keep you in the asset allocation “boat” but is also adjusting the route as we descend. No good Advisor wants to have a client go “overboard” because we get paid to keep people in the boat and moving towards their goals, just like the white water rafting guide.
(Picture: Stein River, BC. Source- www.reorafting.com)
It may seem strange to not want to have the best possible returns each and every year and to “beat the market” but the reality is that what most people need is a plan with their specific goals and a guide to help them reach those goals but to also help clients stick to that plan. Rafting a river is difficult but simple because the route does not change. Your life does not come with that luxury because rocks pop up all of the time that were not there last week. It is navigating those changes and keeping you in the boat that counts and is the true value of competent advice.