Role of long-term assumptions on your financial objectives

It is an old adage that one size does not fit all. The same is true for your financial well-being. When you construct a portfolio, it should be approached, built, monitored, and managed in completely independent ways that maximise the chance of reaching that goal. So if two goals do have the same type of portfolio, there may be something wrong with the advice or both the goals are of similar nature.

Making a portfolio for the long-term requires different assumptions. These assumptions have a bearing on all the decision you take in the entire journey of achieving your financial objectives.

For example, if you were making a portfolio somewhere in the year 2017, you believed that your holding could achieve 'average' long-term results of 12 or 15 per cent on the conservative side. It made a perfect sense at that time. These higher long-term return assumptions led to reducing the amount they contributed to retirement plans assuming future lofty returns would bail them out.

Nevertheless, those assumptions do not find a solid ground now. If they continue to invest with those assumptions, chances are high that there will be a shortfall in your retirement fund. This may be the case for all your financial goals.

Planning based solely on conservative return assumptions can also be disastrous. It has a cost as you invest more and may reduce your overall returns. Therefore, investors should expose themselves to assets that may benefit from upside surprises, but the plan itself should not assume these surprises will occur. So think and act on the belief that you’ll end up with a conservative return, and if you get the benefit of P/E expansion your portfolio will participate.

Hence decide for yourself what the causes of portfolio success are, examine the effects these may have, revisit the allocation once a year, and keep climbing.