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The Five Keys to financial well being

The last five years have left investors battered and bruised, with a new era of volatility and a challenge to our “view of the world”.  What worked for the previous 15 years clearly was not going to deliver results in a post GFC world.  But to make sense of what is happening we need to step back from the detail of the day to day market actions and ask some longer term questions, working backwards from our daily actions to gain a birds-eye view.  These questions may include;

  • How will I make day to day investment decisions? Specifically;
  • What framework will be used to make these decisions?  Gut reaction, a valuation model, risk profiling?
  • What parameters will I use and why?  Which assets to hold and when, how much liquidity?
  • What return am I trying to achieve from this portfolio? And how much volatility can I stomach?
  • Why do I want to achieve these portfolio objectives?  Is it for my lifestyle, for my family?
  • Ultimately all questions get back to one: What are my lifestyle goals and desires?

In 24 years of advising clients I have found that whether they initially have questions on taxation of lump sums, or investing in shares, or whether one product is better than another they ultimately have a few BIG questions they want answered.  These questions include;

  • Will we have enough to do what we desire…?
  • What is the appropriate trade off between present and future desires?
  • How can we help and/or protect loved ones and still address the above questions?

So far many questions and no answers! But the answer to these questions is unique and individual to each person. At Financial Clarity we help clients answer these questions through a structured process, culminating in a specific “Financial Blueprint” unique to the client and ultimately designed by the client, with our consultative help and framework. The Blueprint not only addresses the BIG questions, but does so in a comprehensive manner through the application of the “5 Money Keys”.

The Financial Blueprint

If you owned a block of land and wanted to build a home, few people would commence building without a blueprint! Most would consult with an architect.

The architect would start by asking them what they want. How may rooms? How important is lighting? Do they want a fresh modern mood or understated elegance? At this stage he is not interested in who will supply the window frames, what the colour of the bricks will be……..

The financial blueprint process is similar. We “begin with the end in mind” through asking the right questions and listening. This helps to build a shared vision of the “finished product.” Again like an architecturally designed home, the financial blueprint includes extensive client input – both initially to assess “where are we now”, but also as the model is being built.

The adviser acts as a facilitator and the process is designed around a lifetime cash flow model which can then be updated each year to reflect your current circumstances and your moving goals.

The Five Money Keys

The foundations of the blueprint are the “5 Money keys”.

Our research has shown that if the 5 Money Keys are addressed in an integrated fashion, then nothing important is left to chance. This then maximizes the potential for success. These money keys are;

  1. Make and Manage It – Cash flow planning and management including a lifetime cash flow model, structuring of salary/earnings and an expenditure plan.
  1. Keep It – Taxation planning, including utilisation of the most appropriate investment structures for each stage of your life.
  1. Grow It – Investment strategies and vehicles, including trade-offs between flexibility and growth, risk and return.
  1. Protect It – Identification of major risks/impediments to achievement of your desired lifestyle, and a sensible plan to address these.
  1. Transfer It – Ensuring your wealth is transferred to your loved ones with minimal hassle and taxation

The integration of these keys is achieved through the use of an individualised client friendly financial model. This enables us to assess the impact of various options, so you can clearly see the financial strategies that are likely to give you the greatest leverage towards your goals

On Track Review Process

After your plan has been implemented, the on-track review process provides a framework to ensure you keep moving towards the goals that are important to you. The review process includes re-assessment of your lifestyle desires and priorities, measurement of your “progress to plan” and recommendations for changes.

But how does this help with Market Volatility?

In volatile times you cannot predict the daily actions and reactions of investment markets. You need an anchor to help make the right decisions in a pressured environment.  This is not to underplay the importance of good investment decisions and portfolio management; it just help keep them in perspective.

The majority of Financial Clarity’s clients have been undertaking this “annual Blueprint review” process for over 10 years and many for over 20. Their goals and desires change regularly, as do their circumstances. For example if Mr & Mrs Smith, through good planning or good fortune (or both) have achieved a position where they will easily achieve their desired lifestyle goals (and they have a buffer) we may suggest they look at de-risking their portfolio (or practicing some retail therapy!).

However to be confident in these recommendations we must be comfortable with the basis of our assumptions. So budgeting and tracking current expenses is important, as is the use of realistic figures for assumptions.  I hear many investors ruing the terrible current returns and finding it quite impossible to conceive of “good times” coming again. However we have been using the same return assumptions  for 21 years with our projections!  These are based upon real returns from Australia’s longest running super fund, the Commonwealth Super scheme.

Investment Strategy

If the proper planning points you in the right direction for your journey, the investment strategy is “where the rubber hits the road”.  Again a proper long term framework is needed to make good decisions.  During the 15 years prior to 2008 the conventional portfolio wisdom was to “buy equities on dips”.  This is an easy and effective strategy in a long term “bull” market, where the last economic recession finished in 1991. However even though it was clear by mid 2008 that this period had come to an abrupt end it was unclear what framework was needed in a post GFC world.


So you must clearly understand the dynamics of this new investment world and identify the important drivers to watch to make effective decisions.  One of these drivers includes the perspective of “on-going deleveraging. In the mid 1990’s most Western countries began loosening credit.  When viewing historical graphs it is absolutely clear that this flowed through from expanding bank balance sheets, to consumer debt and hence into both property and equity markets. These measures therefore need to be watched closely, as until this deleveraging is complete we cannot get “back to normal” in investment markets.

When these measures get back to levels (or trendlines) commensurate with when the leveraging commenced in the mid 1990’s then economies and hence markets will start behaving more “reasonably”.  Until then they are dependent on Government stimulation to ease them through the painful process.  This is one of a few key themes that should be an input into an investors decision making process, and is illustrative of the need to have the proper framework to avoid the emotions that will surely otherwise lead us to erratic decisions in these difficult economic times.

So in summary, a disciplined, planned approach will allow you to frame your decisions in the proper context, allowing you to check that your day to day decision making is consistent with your long term lifestyle goals and view of the world. If nothing else it will give you better peace of mind through clarity. At best it could improve your returns, lower your volatility and help you meet your desired lifestyle goals.

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