Posts Tagged ‘Market Return’

Static Planning: The Need for Review

Friday, October 21st, 2011

 

In a perfect world planning would be easy. You would figure out how much of a resource you would need at a specific time and allocate assets either in a lump sum or systematically over time until this goal was reached. The account would grow steadily over time until the mark was reached – perfect indeed and static.

 

Enter my ism for today: static planning.  Something static doesn’t move; static planning is planning that doesn’t take into consideration market gyrations and changes in business. Static scenarios and the real world do not resemble each other much. Reality dictates that different times call for different assumptions and actions.

 

Here are two real world situations which at different times would have greatly skewed static planning assumptions and results:

 

MORTGAGE LOANS

The average interest rate on a 30 year fixed rate mortgage on October 19, 1981 was 18.45%.  The interest rate on that same 30 year fixed rate mortgage on October 13, 2011 was 4.12%.

 

The difference in these two figures is staggering. Where it would have taken regular monthly mortgage payments of $1,544 to pay off the mortgage under the previous figures, that payment would only require principal and interest payments of $484 per month currently to retire the same $100,000 balance over thirty years. Staggering!

 

MARKET INVESTMENTS

 

Market investments are far from a steady growing figure. For example, so far in 2011, the first four months of the year saw the S & P 500 average increase by 9.1%. Subsequently, that same average fell 18.6% through October 3rd. In the following nine days, the market rallied to 11.5% providing a return total of -1.1% for the year as of 10/14/2011.

 

Volatility like this is certainly not for the faint of heart. That being said, short term bank interest rates of less than 1% hardly seem the place to park assets in hopes of reaching long term goals.

 

MORAL OF THE STORY

 

These are but two examples of the need to revisit plans to see if they are still living up to wants and needs. While everyone is bullish in a good market (just ask them) reality indicates that many people are not anywhere near the risk takers they thought they were. Typical investors have a difficult time allocating enough resources to meet long term goals utilizing low fixed rate products.

 

This is precisely why all types of financial considerations, mortgages, retirement plans, investment strategies and the like, should be regularly reviewed. Advisors are trained to assess different economic environments and tailor them to investor profiles. Can you walk the walk or do you have commitment issues? Matching goals with disposition and financial change requires trained and routine review.

 

Kurt Rusch  CLU,ChFC