Insights + News + Advice

Insights + News + Advice


Financial planning: a strong foundation for weathering the storm.

Equity markets have shown extreme volatility since the outbreak of COVID-19. While the long-term economic impact remains unclear, market environments of this kind can be very difficult for investors to stomach. This can lead to fear-based decisions that can later cause regret. 

Financial plans are designed to help investors ignore the short-term noise and view market events in a long-term context. A well-formulated financial plan will serve as a strong foundation for investors during periods of extreme volatility, reminding them that they have a strategy that was designed and stress-tested to weather storms.

Tim Dillow, Leelyn Smith’s head of financial planning, discusses the importance of a financial plan, explains our financial planning process, and describes how a thoughtful plan can provide comfort to individual investors in uncertain times. 

What types of questions are clients asking in the wake of COVID-19? How do you answer these questions in the context of the financial plan?

The questions I’m receiving from clients now are reminiscent of those received in 2008-2009 during the Financial Crisis. For example: “Is my cash FDIC insured? Will I be forced to work longer? Will I be able to retire? Can I eliminate downside risk?”

Some answers are simple and straightforward; for example, explaining how FDIC insurance works. Others are answered by reviewing an individual’s financial plan and reminding them that we plan for these types of scenarios. The COVID-19 pandemic certainly is a unique situation, but major market downturns are not. When developing plans, we “stress test” them to ensure that they have a high probability of success even with a major pullback in the markets.

In my experience, it is uncertainty that causes investors the most anguish. Once you have a clearer picture and know what you’re up against, you can accept reality and take steps forward. That is what a financial plan enables us to do. Talking about COVID-19’s impact in terms of the financial plan allows us to move beyond the fear and anxiety stage and begin thinking in terms of the tangible impact on your goals and developing a concrete action plan. This is very reassuring for investors.

What are some common mistakes that investors make during volatile market environments?

The biggest mistake that investors can make is to let their emotions dictate their decision-making. Emotions are a natural part of investing, but they can hurt our ability to make sound decisions. Just as greed can cause bad decisions during up markets, fear can cause people to make regrettable decisions in down markets.

When markets decline significantly, investors might look at their losses and say: “I can live with what I have left; I’m just going to bail out of the financial markets now to avoid additional losses.” Once they are out of the market, those losses are irreversible; they will miss the upside when markets rebound. So, short-term decisions that are based primarily on fear and emotion can lead to significant long-term losses and regret.

How does having a plan help investors to avoid that type of response?

Financial planning is designed to help investors view short-term market noise in more of a long-term context. We will most likely look back on the current market challenges as just a ripple in the pond. History shows that volatile eras such as the one we’re currently seeing are typically short-lived, while bull markets tend to last much longer and have a greater impact on one’s success. A financial plan allows us to put all of this in perspective.

Just as importantly, reviewing a client’s financial plan during periods of volatility moves the conversation from vague, “what if?” questions to a pragmatic discussion of how volatility has affected progress toward your long-term goals. For example, consider a couple whose goal is to leave a $2 million inheritance to their children. We can run an analysis and see that the recent downturn caused the probability of reaching that goal to decrease from, say, 90% to 80%. Or, we can show that their projected retirement income decreased from $200,000 a year to $180,000 a year.

Those are both negative developments, for sure. But thinking about the impact in quantifiable terms helps reduce fear and gives clients confidence that they will be OK.

How does Leelyn Smith’s investment philosophy support the financial planning you do for clients?

One of the pillars of our investment philosophy is to minimize the amount of risk investors must assume to get the returns they need to achieve their goals. First, we look for minimum-volatility investments—companies whose stock prices typically fluctuate less than comparable businesses in a given sector or market index. Second, we look for companies that have built sustainable competitive advantages, which we refer to as “moats,” around their businesses. These moats help protect the companies from losing market share to competitors.

These types of investments not only tend to deliver better risk-adjusted returns over time, they also give investors more confidence and conviction. We have found that this helps investors avoid making fear-driven decisions that can be so detrimental to long-term performance.

What is Leelyn Smith’s financial planning process?

We start by learning about each client’s goals and family situation. This involves gathering information about their current financial situation—assets, liabilities, cash flow needs, insurance, estate planning information, and so on. We also dig deep to understand how much risk each client is comfortable assuming. There are several ways we go about analyzing risk tolerance, but the goal is to identify each client’s comfort level and develop a plan that gives them confidence and allows them to sleep well at night.

We believe that it is essential to have an honest and open conversation with clients about their goals. Some goals are concrete, but others are less tangible. For example, we like to ask clients questions such as “How can we help you achieve peace of mind? How can we allow you to transition from the workforce into retirement? How can we get you to a point where you don’t have to think about money, even if financial markets are volatile?”

We firmly believe that how clients think and feel about money is about so much more than numbers on a page. Everything we do must relate back to the human being who is sitting across from us.

Understanding how volatility affects your plan.

Emotions are a natural part of investing, especially during times of extreme volatility. Having a rock-solid financial plan won’t eliminate those emotions, but it is designed to help you process those emotions in the context of the bigger picture and avoid making fear-driven decisions. Most importantly, your financial plan should provide you with peace of mind that you will be able to weather this storm.

If you would like more information on Leelyn Smith’s financial planning process or if you would like to speak with an advisor about how the current volatility is affecting your plan, please feel free to reach out to us. We look forward to speaking with you.

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