The football season is now over and it’s cricket time!.. but if you don’t like cricket don’t stop reading. I’m simply going to use the analogy of how a team builds their score and how, after each ‘Over’, there is a ‘check in’ to measure progress.
Similarly, in financial planning, I often ask prospective clients ‘what their run rate is’ and what growth they need per year, to live the life they want? A bit like the team batting first, they don’t know their exact run rate but have a good idea what return is required for them to firstly stay in the game and secondly, to have a chance of winning.
The same goes for financial planning. Firstly work out the returns required per year so that you don’t run out of money and then work out the returns required for you to really enjoy yourself.
The key objective in cricket is to build the innings, not swing the bat aggressively. It may work for a while but at some point over a longer period of time, you will likely lose wickets. Managing your money is not dissimilar. Investments may perform well for a period of time. You may be largely rewarded for an aggressive strategy but at some point, you are likely to come unstuck.
All too often, I see investors taking far more risk than they need. Complacency sets in. It is my opinion that this is beginning to happen now. Fuelled by quantitative easing, stock markets have surged forward with only the odd mishap along the way. The probability is that we are going to have a lot more volatility. In cricketing terms, a good chance of losing a few more wickets. The key now is to protect your score (wealth) and not be too aggressive. Build your wealth.