Financial Planning Styles

My oldest grandson has been beating me at chess lately.  You know you are getting older when the grandchildren are old enough to vote and they can beat you at chess.

Chess is an interesting metaphor for life and offers insight into how people think.  In Mike’s case, he is fairly strategic and believes strong offense is adequate defense.  Not uncommon.  I have played others who built huge defense capability before they edged out into the offense part.  Either style can work but the offense first style has some spectacular failures.

Emphasis is part of planning and as a planner, your preferred way may not resonate with every client.  It is important to discover their style and have them learn to recognize what other options may be valuable.  Perhaps they can find some middle ground that gives them the best of all the choices and retains enough of their preferred style so they can remain excited about the process.

A middle ground for Mike might include castling sooner.

In financial planning, young people often first want the big win in the investment world.  That usually does not happen and they lose time.  Tempo in chess.

In chess the defense-first strategy is the same as it is in life.  Pretty boring.  The advantage is that you may draw a lot of games but you don’t lose many.  Wins are seldom spectacular.  You know pretty much how you will end up.

In life, the defense first method requires that you solve two problems before you think about winning.  Control time and control debt.

Control time includes the possibility that you may not get as much of it as you hope, so insure your life and your health.  Have a long plan to keep yourself focused.  Have a budget for control.  Have wills and powers of attorney.  Have an emergency fund to deal with surprises and emergencies.  You see what I mean about boring.  What could harm you?  No excitement there.

Controlling debt is a form of investment decision.  Most personal debt includes interest that is non-deductible for income taxes.  Paying debt down is the same as investing in an investment with no risk and a high after tax interest return.   Worth considering.

Paying down debt is riskless because the risk is on the asset side.  The thing you bought with borrowed money is the risky part.  The debt is a certainty.  Paying it down is risk reducing not risk acquiring.  Ask yourself how much risk there may be if you leave the debt and rates rise significantly.

Everyone has a style.  Most of the time that style is too narrow.  A good advisor can make it more connected to real possibilities.

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Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

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