As we head into what could be a volatile couple weeks (and possibly months) in the markets, our focus remains on ensuring our clients are well positioned for the long-term. At the same time, we also want to make sure they can absorb shocks that may not only impact their portfolios, but their entire financial picture in the short-term.
We work with our clients to incorporate their investment and retirement portfolios into a broader financial discussion that takes into account their personal balance sheets as well. What is a balance sheet? It is a summary of assets and liabilities at a given period of time. Put more simply, it is a snapshot of what you own and what you owe. Many people think of the balance sheet as a financial statement for companies used for earnings calls or board meetings, or maybe something they remember learning about in accounting class. We use it as the starting point for every financial planning conversation we have.
Jamie Dimon, the CEO of JP Morgan Chase, often credits the success of the company through good markets and bad to always maintaining a “fortress balance sheet”. Going back well before the Global Financial Crisis of 2007-2008, Dimon was relentlessly focused on having the firm’s balance sheet prepared to withstand all stages of the business cycle despite receiving criticism by some for being too conservative or risk averse. In hindsight, it left the firm in a stronger position than many of the banks who needed bailouts or became insolvent when the crisis did strike. Trying to understand the financial statements of a big Wall Street bank is no simple task, but the concepts involved in Dimon’s fortress balance sheet approach are pretty straight forward. To us, the approach applies to individuals as much as it does to one of the largest financial institutions in the world. The main components are as follows: ensuring you have sufficient liquidity at all times (cash on hand), you are not over levered (don’t have too much debt), and you are well prepared to withstand unexpected shocks while maintaining flexibility should opportunities arise (i.e. loss of a job or income, or having the ability to purchase a new home quickly).
While a financial plan is often seen as long-term retirement planning tool, if done well it can be so much more than that. It is not something you think about once and then throw in a drawer until you get close to retirement. It should be a framework that helps you and your family to be more prepared for what life throws at you and adapt as needed when your situation evolves. Working with an advisor to better understand your balance sheet will also prompt you to do some of that organizing of your finances you may have been putting off (maybe you have been meaning to get around to it since you changed jobs, got married, or had had another major life event). It can uncover items you forgot about, aren’t paying attention to, or that may be holding you back at the moment (maybe an old credit card with an outstanding balance, or the student loans you are deferring). Finally, it allows you and your advisor to build a deeper relationship where both of you can gain a better understanding of your personal habits around money while building your own version of a “fortress balance sheet”.
The COVID-19 Pandemic and the resulting economic fallout has exposed and accelerated many trends, one of which is the fact that many Americans (as well as companies and government entities) have too little in savings and too much debt. As Warren Buffett famously said, “you only find out who is swimming naked when the tide goes out”. In working to get your financial picture in order you can gain more financial flexibility and security. More importantly, our goal is to help you gain peace of mind by positioning you and your family for a more prosperous future while being better prepared for whatever comes next.