The Difference between a Portfolio and a Plan

Do I have a plan or a portfolio?


You may hold a handful of investments that have performed quite well over the past year given the historic success of the current stock market. But there's a huge difference between a portfolio and an actual financial plan.


A financial plan involves creating a decision-making framework to guide your actions. If this... then that.

The past year and a half has demonstrated that even a potbellied pig can do just fine for itself with a portfolio of investments when things are going well.


But this doesn’t help all that much if you don’t have a plan when things get harder in the markets.


What is my plan for the next downturn?


The Corona crash was over so fast, most investors who weren’t prepared for it were offered a chance to recover quite quickly.


It wasn’t some drawn-out bear market like the 2008 crash that took years to recover from. Investors were made whole in a hurry. Quick gains can paper over a lack of investment planning.


Perhaps extended bear markets are a thing of the past but you have to account for market downturns no matter how long they last.


I’ve talked to a number of investors that had no idea what to do during the crash because they didn’t have a plan ahead of time. Even a subpar plan is better than no plan.


It’s important to prepare for a wide range of market outcomes, both good and bad.


When we create a financial plan that integrates both short and long-term goals we orient our investments and our risk tolerance against a time horizon. How long until I need this money to reach this goal? How many years til retirement? How many years til the kids are in college? How many years til I want to buy a home?


Once we assign a time horizon to the goal, then it's easier to understand how much risk can be loaded up in each category.


A long-term time horizon of 20 years can tolerate 80-100% equity allocation because the investments within this bucket can weather market volatility. If there's a downturn, leave this investment as-is and allow for the market to recover.


A short-term time horizon of 5 years...the risk should be reduced to 50-60% equity allocation in order to preserve capital in the event of a market pull-back or extended bear market. If the market takes a dive right before you get ready to break ground on your new construction project, you will be forced to take considerable losses in order to get your money out (or postpone your project hoping the market will recover). Talk to anyone over the age of 45 and they will have an anecdote or 12 about their experience in the Great Recession or the Dot Bomb or Black Monday.


Look at your current portfolio, do you know what you would do if the market went south? Do you know what you would sell and what you would hold? Do you know for sure how you will reach your financial goals regardless of market performance?


If the answer is no, it's time to step back and create a financial plan that will inform your decisions in the future.


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