December 5, 2001
Welcome to the real market
No financial planner can predict catastrophic events, but a good one will help clients build financial plans to weather the fallout
'Nothing will ever be the same after Sept. 11," was the sentiment repeated many times in the days following the terrorist attacks in New York. It certainly seemed that way as the world watched the World Trade Center towers crumble into a heap of lost human life, and the domino effect crashed into world economies, and North Americans' sense of security, employment, and the hopes and plans of their daily lives.
Uncertainty is a loaded word these days, echoing in the back of our minds while we try to get on with life but it can become particularly intrusive when we are planning for the future, especially our financial future.
That is because a sizeable chunk of financial planning involves making assumptions about inflation rates, job retention and expected pay increases, income tax rates, rates of return on various asset classes, the availability of government-sponsored programs such as Old Age Security and Canada Pension Plan, and a host of other events that may or may not occur in the future, says JoAnne Anderson, financial advisor and president of MoneyPower Inc. in Mississauga, Ont.
"I always point out to clients that I do not have a crystal ball on my desk. We can only take educated guesses about what will happen and when it will happen," she says.
Before -- when things were normal, when we were not under a constant barrage of reports on events that even the most educated guesses could not have foreseen -- there was more confidence.
Now that North Americans have seen airplanes become weapons of mass destruction, and they discuss nuclear attacks, a Third World War and the possibility of a depression over morning coffee, the surreal has become real. Can any assumptions be reasonable in this new climate?
Yes, the experts say, but investors need to calm down.
"I think the reaction to the attacks has been largely emotional. Yes, there are certain sectors of the economy that have been negatively affected by the events. At the same time, there are other sectors that benefit. If you look at the investment climate, for example, most major North American indexes are back at their pre-Sept. 11 levels," Ms. Anderson says.
Most experts agree that the essentials of solid financial planning remain the same, and there is no need to reinvent the wheel or to panic.
Canadians, they say, have actually become more realistic, and that is a good thing.
In recent years, North America has experienced an unprecedented bull market, which has created a false sense of security, as well as an abundance of overly optimistic expectations, Ms. Anderson says.
Carey Vandenberg, a chartered financial planner and president of C.E. Vandenberg & Associates Inc., in White Rock, B.C., concurs: "From a planner's perspective [things have not changed.] What it has done is make clients more realistic. Now when I show 8% [for a long-term average annual return], they say they would be happy with that, which has actually made my job easier as clients' expectations are out of the clouds. Expect the unexpected is much easier to sell."
It is what good financial planners have always done.
Mr. Vandenberg says even before the attacks, financial planners were increasingly switching to Monte Carlo simulation, a high-tech statistical method for assessing a portfolio that can calculate long-term return based on a multitude of variables, as well as the likelihood of those occurring.
It is like rolling the dice a thousand times and saying, "OK, what if?"
When combined with the eagle eye and logic of a good financial planner, and accurate historical data, this method does not eliminate uncertainties, but it can help planners and their clients prepare for the unexpected, Mr. Vandenberg says.
"A good financial plan will be built to withstand upward and downward cycles. It will be flexible. It will be built on a strong foundation and will address risk management," Ms. Anderson says.
Prior to Sept. 11, many do-it-yourselfers might have interpreted risk management as simply the need for a diversified portfolio with a good balance of high- and low-risk investments. But given the thousands of layoffs, including the vanishing act of discount air carrier Canada 3000 that left almost 5,000 workers stranded, most people now realize risk management begins with the basics.
"By risk management, I mean such things as living within your means, building cash balances to cover a period when work is interrupted, making sure property insurance, life insurance and disability coverage are adequate, limiting exposure to debt with non-deductible interest, building investment portfolios, an asset allocation that will contribute to capital preservation, and having an up-to-date will and estate plan," Ms. Anderson says.
A person's greatest resource and asset is his or her future earning power, Mr. Vandenberg says. "I know a couple [not clients] who both work for Air Canada. It's these kind of people who need to look at diversifying their income stream. That kind of undiversified risk can be the most devastating, particularly if you are not highly skilled and have become accustomed to living on a reasonably good income or two," he says.
Flexibility is important, Ms. Anderson says. Updating transferable work skills is important, and so is managing debt and differentiating between needs and wants.
"Do you need that 3,000-square-foot home for your family of 4.3 or would 2,000 square feet be just as comfortable? Property taxes, heat and mortgage expenses would be cut by 33%. I think many people are doing the exact opposite by buying larger homes [on the assumption] you can finance more because the rates are lower. Do you really need two cars? Three?" Mr. Vandenberg asks.
Financial planners have been trying to drill these things into our heads for years, but many of us were in such a rush and on such a high, we did not stop to listen.
The Sept. 11 attacks were a brutal wake-up call -- a reality check and a reminder that while nothing will ever be the same emotionally, the basics and the need for balanced planning remain steadfast.
"I do believe people will naturally change their perspective, and probably for the better," says Mr. Vandenberg.
"Those who were a little more adventurous with their investments will think twice. Those sacrificing today for their future plans may spend a little more today justifying it with, 'I could be dead tomorrow.' "