Falling off a cliff edge

One of the delights of doing this job is to demonstrate to certain clients that they simply have enough.

They have enough to retire, have enough to make substantial gifts to the next generation or have enough to cope with later life costs such as care fees.

There is no getting away from the fact that the process of financial planning depends quite heavily on assumptions about the future.

Inflation, interest rates, and growth in the value of invested assets whether those assets are shares, cash or property.

Of course no one knows what those assets will actually grow by in the future; if you meet someone who says that they do my advice is to run a mile!

Whilst we don’t know about future growth rates, we can make assumptions. Our view is to be conservative in the use of these assumptions.

We assume higher rates of future inflation than are targeted by the Monetary Policy Committee of the Bank of England. We assume low interest rates will continue and we try to be as realistically conservative as makes sense in respect of other asset class growth.

Naturally there is an absolute need to review these things over time (life is what happens when you are planning something else!) and adjust the results based on actual events.

One of the assumptions we often use is about building confidence when the client asks the question, “But what if there is an investment market crash?”

As part of the financial planning process, we model a 20% investment market crash, the proverbial cliff edge fall, from which there is never a recovery.

This scenario is a bit extreme and unrealistic perhaps, but if this still demonstrates that they have enough then that is great news.

Making financial decisions is all about confidence. Suitable assumptions that are described and understood by our clients are a vitally important part of that process.

If your financial plan can withstand a 20% investment market fall with no recovery, will you still be alright? Share on X