Financial planning and portfolio management, the Exponent way: A field guide

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There’s a scene in the classic novel Jane Eyre that unwittingly illustrates an important financial distinction: When discussing the financial suitability of the protagonist’s future husband, the characters focus on his rent roll – his passive income – instead of his net worth.

It’s a subtle difference that cuts to the core of Exponent Investment Managers’ investment philosophy.

Net worth, after all, can sometimes be deceiving. A large home, cottage, and pair of luxury cars look great on the balance sheet but can also saddle you with high fixed costs. While that’s fine in the right circumstances, it’s not necessarily a good reflection of financial health. And it’s not a strong financial plan.

This is why our first lesson to our clients is that wealth and income in retirement come in various forms. And to take advantage of that, you need a well-crafted plan.

Financial planning for different clients (or, the pub analogy)

Here’s a thought exercise: Picture the newly retired you as a thirsty patron sitting at a pub in front of a lineup of glistening brass taps.

Each tap represents a form of income. Perhaps one tap is an RRSP, another represents your TFSAs, a third your high-interest savings account, and a fourth a holding company you can draw down. Each is a lever you can pull to pour out the right amount of income at the right time.

Problem is, there’s a finite amount of beer on tap, and you’ve got to make it last for years. And that’s the goal of financial and retirement planning: To ensure you have as many taps available as possible when you need them.

But that’s not easy without financial planning. Indeed, the income sources available to an individual or family in retirement depend primarily on your situation:

Business owners often have a liquidity event around the sale of their business, giving them a head start on retirement. Still, they don’t necessarily have any post-retirement sources of passive income.

Executives are compensated well but have a longevity risk: Most are executives for five to 10 years, and a significant portion of their wealth is often tied to deferred stock – making retirement during a market downturn a considerable risk.

Professionals are also compensated well and usually have a relatively high net worth but usually have high fixed costs and little equity or passive income to rely on post-retirement.

Widows, lottery winners, and insurance claim beneficiaries are both windfall situations that come with a raft of emotions, including impostor syndrome around whether they deserve such an influx. There’s often a level of anxiety around whether they’re up to the task.

In every case, it’s imperative to plan your financial picture well in advance while being honest with yourself about your situation and what you’ll need to ensure a happy, comfortable existence in your retirement.

Otherwise, you may come home to a darkened pub with dry taps.

Exponent Investment Management’s three steps to financial independence

Most of our clients are pretty savvy. They’ve usually already spoken with others in the investment community or have even done some planning before coming to us. They typically have a certain amount of knowledge on the subject.

They already know, for example, that there are two main ways to return a profit in retirement: Through growth stocks or passive income. We value both at Exponent.

Our approach to portfolio management starts by taking inventory of what you’ve got, plotting what you want out of retirement, and then factoring in your passive income sources and tax considerations. Then it’s simply about modeling all that data to see if you’ve done enough or if you’ll run out of money at age 78 (pro tip: You want to avoid the latter).

Here are the two main steps Exponent Investment Management takes when engaging a client for the first time.

Defining needs, wants, and goals

Visualize success

It might sound silly, but if you can’t visualize or illustrate success, you’ll have difficulty defining it (and achieving it). Just like in project management, defining what success looks like well in advance – and then plotting a course to reach that success – is crucial to reaching a successful outcome.

In this case, that’s a happy and well-funded retirement. But what exactly does success in retirement look like? Is it six trips a year? An RV and a campsite? Lazy afternoons at the cottage?

It all depends on your goals and preferences.

The first step of visualizing success is being honest with yourself – and if you have a significant other, being honest with each other while being prepared to have some (sometimes difficult) conversations.

This exercise has value because financial resources and time are both finite. You can’t do it all. It’s better and more prudent to focus on what’s most important: If that’s family, then perhaps owning a cottage makes sense. If it’s travel, you’ll have a completely different set of priorities.

Either way, you need to visualize and articulate success to make it happen.

Inventory everything (including your lifestyle)

Next, take stock of all your assets, investments, and liabilities. Use that data to map the costs of your current lifestyle. Because most people’s most significant spending components are children, debt repayment, taxes, and savings, we typically remove these elements during this exercise to get a true sense of the cost of a client’s lifestyle.

Don’t worry – this isn’t a shaming exercise meant to make you feel guilty about your weekly restaurant habit! Rather, this shows your projected financial position during retirement in the cold, hard light of day.

This activity also helps identify our clients’ passions. What activities are most important to you, and which are you willing to eventually drop?

Everyone has passions. It’s what makes life worth living. But, again, we can’t do everything in retirement – and it’s easier to pick and choose once armed with that knowledge.

The investment proposal (or, the hatchback vs. the sports car)

The next step is a deep dive into our investment philosophy and process around growing the portfolio.

Put simply, we’re the hatchback of investing: Smart, measured, and efficient. We don’t typically go for hot, flashy stocks that move fast but often flame out and leave you at the side of the road.

Our investment philosophy revolves around three main concepts:

The value of dividends.

Although value stocks that pay dividends are boring to some investors, dividends are one of the most reliable ways to earn passive income in retirement.

International diversification.

Most portfolios we see during initial meetings are very Canada-heavy. Including more international stocks is a good way to diversify your risk and potential gains.

Buy-and-sell discipline.

We don’t try to time the market but adhere to a philosophy of buying at attractive prices and selling when things get too expensive. We typically deploy cash during market downturns (when stocks are cheaper) and sell during frothy bull markets, which can be counterintuitive to some.

We also implement our clients’ portfolios and deploy money strategically based on market conditions instead of immediately going all-in, as is the case with most investment products.

While this buy-and-sell discipline can sometimes seem frustrating for clients when fear of missing out (FOMO) sets in, this framework keeps your investing grounded and removes the temptation to chase shiny objects.

Know what you own and understand your investments

Instead of simply buying a stock because it’s sexy or has good press, it’s imperative to know what you own and appreciate why you bought it in the first place.

Knowing what you own helps during market downturns (when the pressure to sell can be immense) because if you understand why you own a stock, it’s much easier to see its inherent value – even during volatile times.

Volatility and follow up

Understanding your investments and why you made them helps during volatile times – but you also need to accept that volatility will happen. It’s just part and parcel of investing. The goal is to maximize your upside volatility and minimize the downside while recognizing that downside volatility will always be there.

Take the Apple example. Nearly bankrupt in the early 2000s, the company with a close to $2.5 trillion market cap took off after launching the iPhone and experienced exponential growth in the years following.

But Apple’s growth curve doesn’t show the numerous times since the early 2000s when Apple’s stock price dipped around 20 percent. The investors who stuck with them understood why they had bought the stock: Because of Apple’s great products and long-term value. We have a feeling they’re glad they did.

Know your custodial fees

Exponent Wealth Management’s fees are slightly more than you’d pay for a non-managed portfolio, but around 20 to 50 percent less than large advisory services provided by banks or other large financial organizations.

Our fees are based on asset value, so there’s never an incentive on our part to bump up the number of monthly transactions or products sold. The incentive is always to protect and grow your capital.

Minimize downside volatility (and mistakes) with a sound investment plan

To summarize: Plan diligently and realistically; value growth, passive income, and diversification; exercise strong buy-and-sell discipline; know what you own; and be prepared to ride some volatility – good and bad.

But we’d be remiss if we didn’t mention that in every client engagement, we try to ensure an understanding that life, and investing, are iterative processes that are essentially a game of mistakes.

While it’s, of course, best to avoid mistakes altogether, it’s OK – even healthy – to realize that mistakes sometimes happen; those who come out on top are the investors who recognize their mistakes and quickly pivot. Minimizing mistakes is especially important as you grow older: As investors age, the ramifications of a mistake grow exponentially because there’s less time to recover.

Exponent Investment Management: Independent wealth and investment management
That’s why it’s crucial to ignore the noise and look for the signals that tell you where the market is going. Exponent Investment Management’s carefully curated and unbiased team of investment managers and financial planners has years of experience doing just that.

We’ll help you design, implement, and manage your portfolio and financial plan so you can benefit from growth and income with a global perspective. Visit us today to book a consultation.

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