Many people think that a financial portfolio and a financial plan are the same thing. Certainly, there is overlap. However, there are some significant differences between the two, which can create some confusion.
Generally, a financial portfolio only includes the investment portfolio itself and not the bigger picture. A portfolio may consist of stocks, bonds, mutual funds, exchange-traded funds (ETFs), or alternative investments.
Financial planning is more comprehensive in nature, looking at a client's entire financial picture, needs, wants, and barriers. It involves creating strategies, including investment strategies, that will help achieve short- and long-term financial goals.
Watch the video to learn more about why it is important to understand the difference between a portfolio and financial planning:
Recently, our firm received an email from a client asking about investing in I bonds. She readily admitted that she did not really know much about them but said they were all the chatter in the doctor's lounge and wasn't sure if she should jump in on them.
This article aims not to explain the intricacies of I bonds but to reiterate what we already know, that it is quite easy to confuse a portfolio with a plan.
Over the last four months, market prices have been more volatile than anything we've seen in the previous decade, notwithstanding the flash correction from COVID. And so, it is natural to ask about the impact on your portfolio or if any changes are warranted. But changing your portfolio based on how high or low prices are, is not really a sustainable investment strategy. A plan involves creating a portfolio that balances your risk profile and time horizon and uses historical evidence around the highest probability of reaching your goals. It involves probabilities and assumptions and scenario analysis.
Generally, changes to an investment plan are less a result of fluctuations in market prices and more often appropriate when there are fluctuations in your goals or time horizon. The beauty of creating guidelines within the construct of a plan is that you don't need to ask yourself what to do every time one of your holdings goes up a lot or down a lot. The point of having a disciplined plan, not just a portfolio, is to minimize regret by removing emotion.
Now, with that said, let's talk about rebalancing. Rebalancing is not an emotional response to volatility. Rebalancing within a portfolio is the disciplined process, usually automated, of selling assets that grow larger than their intended allocation to buy the sectors that are smaller than desired. Basically, the automated discipline of selling high and buying low doesn't mean your asset allocation will always be perfectly timed to market cycles. Of course not. But when it comes to investment success, it's important to start with a disciplined allocation. And then remember, history shows over and over the best way to receive the market's long-term returns in your portfolio is to not interfere with the perpetual compounding.
At this most basic level, your portfolio is a basket of assets like stocks, bonds, commodities, cash, and cash equivalents, while financial planning is the process of a thorough review of your financial situation and creating a plan to reach your goals. In many cases, an investment portfolio will be a part of a comprehensive financial plan.
Spaugh Dameron Tenny specializes in the unique financial planning needs of medical and dental professionals. And we understand every individual comes with a unique financial background, challenges, needs, and goals, and we're here to help you along the way! So let our team of financial planners help you create a financial plan that will help your reach your goals and dreams. Contact us today!
Shane Tenny is the managing partner of Spaugh Dameron Tenny. Along with hosting the Prosperous Doc® podcast, Shane has a true passion for behavioral finance, helping clients and audiences understand how to develop successful strategies based on their unique temperaments. An accomplished and highly engaging speaker, Shane is regularly interviewed for television and podcasts, is actively involved in the Financial Planning Association®, and contributes to industry advisory boards.
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For over 50 years, Spaugh Dameron Tenny has provided comprehensive financial planning for physicians and dentists across the U.S. In addition to providing personalized advice, we walk our clients through their options to help maximize finances and maintain financial security.
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