Should you update your financial plan given recent volatility?

Investments

For those who are concerned about their investments right now, we should start with some perspective. The TSX is down about 8% over the 12 months ending April 30, 2020. The S&P 500 is up about 3.5% in Canadian dollar terms. The FTSE Canada Universe Bond Index is up about 8.5% over that period. Despite a sharp correction in March, markets have rebounded nicely. And the year-over-year numbers do not look all that bad for a balanced portfolio that is hopefully break-even.

If someone had a predominantly Canadian portfolio, or only owned a few stocks in hard-hit sectors, their investments may not look so great right now. Or if an investor panicked and sold in March, they may have missed out on the 30% recovery as stocks have bounced back from the recent lows. A single flat year-over-year return should not be enough to derail a financial plan, but updating a financial plan that helps give peace of mind can be worth it.

Investors need to expect volatility and plan for it. The S&P 500 has averaged a 20% decline about every six years over the past 100 years. Bear markets generally precede a recession, though not always.

FP Canada—the governing body for Certified Financial Planners (CFPs)—recently released the 2020 Projection Assumption Guidelines for long-term financial modelling. The suggested assumptions are:

• Inflation: 2.0%
• Fixed income: 2.9%
• Canadian equities: 6.1%
• Foreign developed-market equities: 6.4%
• Emerging market equities: 7.1%

These guidelines apply to straight-line assumptions and the equity returns have been reduced to allow for the variability of long-term returns and consider the risk of early stock market declines. Advisors using Monte Carlo probability simulations can add 0.5% to the equity returns.

Interestingly, the guidelines for 2020 have seen fixed income returns reduced from 5% to 2.9%, and Canadian equity returns drop from 7.25% to 6.1%. For conservative investors and advisors who have not engaged in recent planning with clients, relying on old assumptions about returns and sustainable spending could be a reason to revisit past planning.

Should you update your financial plans just because stocks have gone down? Probably not. You should update your financial plan from time to time simply to revisit all the potential inputs like income, expenses, tax rates, lifestyle changes, and so on.

Watch: Portfolio builder lesson 3

Jobs

If someone has lost their job, the type of financial planning they should be focused on is probably more short-term in nature. In other words, things like:

• Do you qualify for government benefits?
• Are you entitled to severance?
• What are the tax implications of a severance?
• Do you still have group benefits, or do you need to replace lost coverage?
• Do you need to make a decision about a company pension or savings plan?
• Will you need to use investments or debt to fund expenses if you cannot easily replace your job?

For those who are close to retirement, a job loss may be a reason to update a financial plan to determine if you can afford to retire in the same timeframe as you’d previously envisioned, and help make decisions related to pensions and insurance coverage. But for those who are searching for a new job, short-term financial planning is probably more important than long-term.

Business

The impact of the pandemic and other significant life or business changes should prompt someone to revisit past planning. As with a job loss, though, some of the considerations should likely be short-term in nature, like:

• Do you qualify for government benefits?
• Should you be considering reducing hours or laying off staff, even temporarily?
• Should you change or reduce your own compensation (salary, dividends, shareholder loans, etc.)?
• If you need to supplement cash flow, should you take withdrawals from your investments?
• If you need to borrow money, should you borrow personally or corporately?
• Is the business still viable and profitable enough to keep running?

Some of the business planning a business owner can do should be done with assistance from their accountant or an employment lawyer. Some require the business owner to make reasonable assumptions about the future of their business.

I have worked with business owners over the years whom I have encouraged to consider closing their businesses and getting a job elsewhere. This may not be appealing to some business owners, but it may be easier than going down with the ship, so to speak.

Like anyone, a business owner should revisit their financial plan from time to time, as significant changes may impact retirement, spending, saving and tax strategies.

The upshot

COVID-19 has had a big impact on different people in different ways. Some studies have shown that significant unexpected events are among the main contributors to retirees having saved too little for retirement, as opposed to things like poor investment returns or simply not saving enough each month.

Years from now, there may be people who look back and cite the pandemic as one of the contributing factors to their own retirement savings regret. Now is a good time to hit pause and assess your finances, and it may or may not be a good time to update a financial plan.

Most importantly, the younger you are in your financial journey, the more important it is to know there may be other such negative events that occur during your life. Hopefully, the positive surprises outweigh the negative ones.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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• Should you consider using joint accounts to avoid probate?

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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