There are times in life when drifting is good. I can think of at least 3 situations where drfiting is good.
But more often than not drift is fatally dangerous. Take the car drifting around a corner and put it on a wet road. Take the lilo and place it on the ocean and that same drift can become fatal.
“To reach a port we must sail –
Sail, not tie at anchor
Sail, not drift.”Franklin D Roosevelt
When it comes to Financial Planning though there a 3 types of drift that are near fatal to your financial planning and each for very different reasons.
One of the things I’ve done during lockdown is clear through my filing cabinet in my office at home and whilst doing so I came across one of my first payslips. A grand total of £1,035.85 after tax. I distinctly remember thinking how an extra £500/m would feel and how ‘rich’ I would be. Needless to say that in that time our lifestyle has drifted. Sometimes deliberately such as having two children, a few house moves and at other times through lifestyle drift. Even simple things like TV subscriptions. In 2008 we add no Netflix, no Amazon Prime, no Dinsey Plus, no Sky TV.
Over the past 10 years my wife, Morgana, and I have developed a discipline of routing through our monthly financial commitments and shedding the fat. Those areas where our lifestyle has crept too far.
One thing I have noticed is how much money we are saving as a family by not being out of the house. The Starbucks Card hasn’t been topped up, the coffee shop notifications aren’t happening on our Monzo account and there is no more forgetting lunch and spending £10 at Costa for a quick bite. These things that we can easily ‘afford’ in the short term but cause us to drift away from our true financial goals over time.
In my time as a Financial Planner, I have come across too many people who always have an excuse ready and waiting for why they haven’t started yet. Whether its fitness, education, learning an instrument or putting money towards their Financial Plan.
If Just need to……
Once I have…….
I can’t until……..
Waiting for the right time often leads to nothing.
By way of two examples lets imagine two people who I shall call Miles and Melisa*
Miles earns big bucks. Over the last 10 years Miles he has not managed to save a penny. His house has gone up in value but so has his mortgage. His income has gone up but so have his expenses. He has suffered inertial drift. He has stood still but time has moved on. He has drifted through the last ten years is no more certain of his future than he was a decade ago. He meant to start saving but it just kept getting put to the bottom of the list.
Melisa’s income has also increased over the last 10 years and started saving £200/m 10 years ago. Each time she has met with her Financial Planner she increased the level of savings by just £20/m. When COVID-19 came about she had put away over £33,000 which was available to live off or invest in her business whilst it was on lockdown and investments that are also in place that are working away for the long term.
Yesterday my daughter made biscuits. She got the ingredients out, measured them perfectly and mixed it all together. Only she didn’t. Somehow when we bit into the biscuits they were really salty. She can’t put her finger on when it happened but somewhere along the way too much salt entered her biscuits and it ruined them.
I applaud you if you have a Financial Plan in place.
You are investing? Take a bow.
You have a well diversified portfolio and selected a good balance of asset classes. #winning
But that was then. Since then some of your investments have gone up. Some have gone down. Crucially they are no longer in the proportions they once were and you are taking considerably different risks than you thought.
We call this portfolio drift.
Take a very simple £100,000 medium risk portfolio invested 50% in Equities and 50% in bonds. Equities and Bonds both over time they increase in value but Equities by 20% and bonds by 10%. This has moved your £50k Equities and £50k Bonds portfolio to £60k Equities and £55K Bonds. This is no longer balanced in the way you wanted, you are carrying more risk than you want and if a market shock happens you will be faced with larger falls in value than you are comfortable with.
Conversely during bear market drops where, for example, Equities fall 20% and Bonds fall 10% you end up with a portfolio of £40K Equities and £45K Bonds. By not rebalancing this portfolio when markets rally you end up not benefitting from the recover as fully as you should.
It happens and the only way to overcome it is to reguarly rebalnce your portfolio. In many ways it means the portfolio is working. But unchecked it poses risks to your plan.
If you are concerned about drift in your Financial Planning schedule a meeting with one of team today.
Jon Doyle is Founder and Financial Planner at Juniper Wealth Management. Advising clients since 2008 he has guided clients through good time, bad times and the ugly. With a clear vision on how advice should be delivered and strong opinions on how we should be investing money in order to live the life we want to live free from money worry.