YOU CAN'T HAVE A RELATIONSHIP WITH A LEATHER BOUND PLAN

A retirement plan or financial plan is only as good as the assumptions on which it is based. The bottom line of any financial plan, is the assumed return on investment. Advisors and investors, who take a "cookie cutter" approach, tend to use the long-term historical stock market return averages of 8-10%. After making this flawed assumption, many people have realized how worthless their financial planning can be. To see how they come to this realization, take a look at the actual returns of the last decade for a hypothetical portfolio invested in the S&P 500 starting with $100,000.

The same $100,000 using 8% annual return:

This massive $196,644 difference in portfolio value ($238,285 versus $434,929) highlights the need for proactive planning, rather than spending thousands of dollars on a leather bound plan that may be outdated as soon as it is finished. At Pilot Wealth Management we advocate having a strong, on-going relationship with your advisor and two-way, open communication. When the inevitable changes happen in the market or in your life, it should be easy to call your advisor and make adjustments without having to create another expensive plan.

Proper asset allocation typically accounts for 90% or more of a portfolio's return². Unfortunately for those with the long term 8% approach the asset allocation often doesn’t change as proactively as it should. Our goal is to manage downside risk for our clients, as our proactive management would reduce exposure when the market is frothy (see our positioning during the recent downturn) and allow us to add/increase to asset classes that have become relative bargains.

When working with our clients, historical returns act as a rearview mirror by providing context. However, most of your time driving is spent looking forward. The old saying, “past performance should be no indication of future results,” still holds true. We have found our in-house research and forward looking projections are much more effective in navigating client portfolios than a leather bound plan that neglects reason. At least 8% looks good in leather.

1. Data from Standard & Poors via http://en.wikipedia.org/wiki/S%26P_500
2. Ibbotson, Roger and Kaplan, Paul. “Does Asset Allocation Policy Explain 40, 90 or 100 Percent of Performance.” Financial Analysts Journal, January/February 2000.