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What Actually Is A Financial Plan?

A big misconception about financial advisers or financial planners is that you use them for their special ability to foresee how the markets will behave and that they know which stock or investment is going to go up.

For sure, that may be how some financial advisers claim to add value and for short periods of time, some might even be lucky enough to do it. But that is not financial planning and that is not what you should engage a financial adviser for.

When it comes to proper financial planning, the best financial planners will not plan a client’s life and money based on what investment they think will perform, predictions on government policy, or the direction of the economy. Nor should they claim that they know what any of the above will look like in the future.

But if not investment predictions, then what?

This article looks at what it actually means to create a financial plan alongside a financial planner.

Your Life

One thing we notice with new clients is that they often want to jump straight into the numbers, financials, and solutions. But if we don’t know what is important to you and what you are setting out to achieve in life, focusing only on the numbers lacks any context. After all, your money is merely an enabler to do and have the things you want to in life.

Perhaps it might seem odd, but a meaningful financial plan should initially put your wealth to one side.

What does money mean to you? Are you hoping to change career? What does your ideal life look like?

A plan based on expectations, not forecasts

Many of us may have a personal opinion on what they think will happen to the economy or the stock market in the future.

But a good planner knows that the future is notoriously hard to predict and the chances of picking winning stocks are very low, if not impossible to do on a consistent basis.

Academic observation of historical data reveals broad patterns of behaviour around investments. This allows planners to create a sensible financial plan that is non-speculative and rooted in sound investment principles, which will you give you a higher chance of success. This approach is commonly known as Evidence Based Investing.

For example, history will tell us that you can expect the stock market to achieve an average return of 6% a year over 20 years versus ‘we believe this stock will return 10% next year.’

An investment strategy you can stick to

Whatever investment strategy you implement, it won’t be effective unless you can stick to it long term. The initial step for achieving this is to set an appropriate investment strategy based on your needs, goals and appetite for investment risk and volatility.

But over time, sticking to a plan comes down to understanding the investment journey and managing your emotions. A financial planner adds value by educating and coaching you over time to ensure you remain on track and reap the benefits of long term investing.

The evidence tells us that the stock market will have more good years than bad years, but there will still be bad years. The key is to ensure your plan is fit for purpose and that you can remain calm through the ups and downs.

A financial planner will help you with what can be controlled, such as managing risks through diversification, regularly rebalancing your portfolio and making costs as efficient as possible.

A plan is not set for life

A financial plan is not mean to be a one time, set in stone plan for you to carefully follow – life changes. A financial plan should be set up to weather any unexpected economic and life events. It should also show you what life could look like under a range of possibilities so you can understand what these outcomes would look like financially.

What if I move back home in 2 years? What if I would like to stop working 5 years sooner than I initially thought?

Pyrmont’s life-centred financial planning process, LifePlan, aims to ensure your financial plan is resilient and flexible for the long term and that it helps you on your way to living the life you actually want to. Get in touch today to get started on your financial planning journey.


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