Diversify your portfolio to protect your wealth and income

When you go to a GP for a minor ailment, a quick fix is often the preferred (and expected) remedy to allow you to get back to a normal daily routine.

In a similar way, clients often engage the services of an adviser for a quick fix to their financial wellbeing.

However, the symptoms displayed by your body are sometimes indicative of larger issues and, in such cases, more serious adjustments may be require.

Such adjustments must be approached with commitment to ensure the symptoms and underlying causes are addressed.

It is no different with financial planning. A common misconception is that you can apply a single-need analysis to address a single financial objective in isolation.

However, that single-need objective may not be addressed effectively if other aspects of a holistic financial plan are not considered.

For example, if you decide to address retirement planning without addressing a need for liquidity (such as can be achieved with an emergency fund), this could prove devastating in markets with higher risk in terms of job security.

Should you be retrenched, both the retirement planning objectives and immediate income needs will be in jeopardy.

Holistic financial planning that may take decades to address should be the goal of those looking to achieve financial freedom.

A financial plan must be flexible enough to continuously evolve.

As you go through life, and financial milestones are achieved, your financial planning journey will need to be restructured — to balance the need to use income to produce wealth, and (with increasing financial freedom) the ability to produce sustainable income from wealth accumulated.

Life is full of uncertainty, so financial plans must be reevaluated regularly, particularly if unforeseen setbacks to the plan occur.

Think of your income-towealth continuum. Does your income need to produce wealth or does your wealth increasingly need to produce income?

Think of this continuum as a series of cash flows across your lifetime (and even into future generations).

Life is not as simple as having 40 years’ worth of steady income to plan for a sustainable lifestyle after retirement.

It is prudent to plan for unexpected events along the way — both setbacks (such as retrenchments, loss of dual income in a household, or additional unplanned dependants) and windfalls (like bonuses, inheritance or tax rebates).

Use these cash flows to bolster your holistic financial planning objectives.

Investments devoted to achieving long-term financial goals (retirement and legacy asset planning) may include more growth assets, so their return profiles will be fundamentally different from those of conservative assets (the assets in an emergency fund).

Your plan needs this exposure to the risk associated with the returns that growth assets are more likely to deliver. Don’t try to time the market. Not only is this almost impossible to do with any certainty, but it carries a high degree of risk.

The optimal way to try to achieve consistent and attractive returns is to be invested through all market cycles in a time horizon appropriate to your plan.

Ensure your financial planner explains what to expect from your portfolios through different market cycles, so you can manage your behaviours when markets react unexpectedly.

Not all investors in any given asset class participate in the indicative returns of that asset class. This applies to listed and unlisted growth assets, and regulated and unregulated ones.

Be sure to invest in assets around which you can plan your investment goals, and which will help achieve the returns expected of these asset classes.

Diversify your portfolio so you are not exposed to the concentration risk that can result from having all your eggs in one basket.

A regular assessment of your plan is crucial to ensure you are on track.