Beyond Resolutions: Build a Financial Plan for Long-Term Success

Stu Morrow, CFA | Mawer Investment Counsellor

We've all been there: standing in front of the mirror on December 31st, absolutely convinced this is the year we'll transform our health, wealth, and habits. But, by the time the holiday decorations are boxed up, that spark of determination has fizzled into old, familiar approaches.

Like most meaningful life transformations, long-term financial success isn't built on New Year's declarations—it's crafted through clear-eyed assessment, purposeful planning, and disciplined follow through.

So, before potentially charging into another cycle of ambitious goal setting to quiet quitting, consider a different (perhaps more boring) approach: taking a methodical look at what's actually working in your financial life, what isn't, and building a strategy that can survive long after the confetti settles.

Think Beyond the Calendar

While it's tempting to focus on quick fixes like cutting expenses or boosting savings, lasting financial transformation requires a wider lens. True wealth-building isn't about the next 12 months—it's about crafting a strategy that aligns with your life's biggest aspirations.

Reflecting on the following questions can help clarify where you stand in relation to achieving your vision:

• Do I have a financial plan?
• If yes, did my investments meet my expectations relative to the hurdle rate (minimum rate of return)?
• Were my savings strategies effective? How am I measuring that effectiveness?
• Did I make progress toward my financial milestones? What does that progress look like over the last few years?

By thinking bigger picture and longer term and being realistic about what worked (or didn’t), it’s easier to create a financial strategy that’s more flexible and resilient—one that can adapt to changes in your life and weather the shifting economy and markets.

The False Promise of Market Predictions

The financial media's favourite year-end ritual is in full swing: analysts and strategists unveiling their market forecasts for the coming year, each armed with charts, trends, and compelling narratives about where stocks are supposedly headed. But here's the uncomfortable truth: these predictions, no matter how sophisticated they sound, have a reliability track record that should give every investor pause.

Consider this recent example: When Wall Street strategists shared their projections in December 2023 to predict where the S&P 500 would land by the end of 2024, their average forecast was 4,861. In reality? By mid-December 2024, the index had soared past 6,000—a massive 25% higher than predicted.

And that isn't an isolated miss. A study in The Journal of Financial Economics concluded annual market predictions to be no better than random chance¹. Economist Eugene Fama's research demonstrates why: stock prices move erratically in response to new information, making short-term predictions essentially worthless.

For investors, the cost of following these predictions can be steep. Research from Dalbar Inc. shows a troubling pattern: those who chase forecasts often underperform the market because they react impulsively to short-term market movements, hunting momentum in stocks that have recently been performing well.

Instead of trying to time the market, consider following proven wealth-building fundamentals: thoughtful diversification, strategic asset allocation, disciplined rebalancing, and careful risk management.

Building a Financial Plan That Works

The following steps provide a great starting point:

1. Know your numbers: Begin with a clear snapshot of your financial reality—income, expenses, debts, and investments. Understanding where you stand today will help identify opportunities for growth and guide smarter decisions about your future. We work with our clients to map out their current position and create a strategy for sustained financial growth.
   
   
2. Set clear, measurable goals: Replace vague aspirations with specific, measurable targets. Don't just aim to "save more"— for example, commit to saving 20% of your monthly income.
   
   
3. Develop a roadmap: Design a detailed roadmap to reach these goals, whether through changing your investment strategy, debt reduction, or increased savings. Our Investment Counsellors can help. They specialize in creating a personalized plan that reflects your overall financial objectives and an investment strategy proposal that incorporates important considerations such as tax effectiveness and risk tolerance.
   
   
4. Monitor and adjust: Financial planning is not a one-time, “set it and forget it” task. Markets change, life circumstances shift, and your strategy should evolve accordingly.

The Power of Disciplined Execution

A brilliant plan means nothing without consistent implementation. Building wealth demands patience and commitment to your strategy, especially when markets become volatile. While unexpected challenges will arise, a well-diversified portfolio combined with robust risk management—including personal insurance, emergency funds, and comprehensive estate planning—helps create a fortress around your financial future.

Time: Your Most Powerful Asset

Procrastination silently erodes wealth-building potential. Every delayed month of saving or investing is a missed opportunity for compound growth. Even modest steps, like automating your savings or opening investment accounts for your children, can generate remarkable long-term results through the exponential power of time.

The Value of Professional Guidance and Support

Managing wealth while balancing life's demands can be overwhelming. Professional guidance offers more than just investment expertise—it provides the structured support and accountability needed to stay focused on your long-term objectives.

Our Investment Counsellors specialize in crafting personalized strategies that help you build lasting wealth while navigating market complexities. Ready to transform your financial future? Connect with us to begin.

Sources & Notes:

¹ Journal of Financial Economics Study on Market Forecast Accuracy: Fama, E. F., & French, K. R. (1988). "Permanent and temporary components of stock prices." Journal of Financial Economics, 21(1), 1-22.

• Article shows the random nature of stock price movements and the challenges in predicting short-term market fluctuations. While the paper is not explicitly about prediction accuracy, it provides a foundation for understanding the difficulty in forecasting stock prices in the short term.

Dalbar Inc. Study on Investor Behavior: Dalbar, Inc. (2020). Quantitative Analysis of Investor Behavior (QAIB). Dalbar.

• Dalbar's annual report shows how individual investors tend to underperform the market due to poor timing decisions, such as chasing past performance, especially when reacting to short-term market movements.

Eugene Fama and the Efficient Market Hypothesis (EMH): Fama, E. F. (1970). "Efficient capital markets: A review of theory and empirical work." Journal of Finance, 25(2), 383-417.

• Fama’s Efficient Market Hypothesis suggests that stock prices are largely unpredictable and that it's nearly impossible to outperform the market consistently by making short-term predictions, supporting the notion that trying to time the market is a futile exercise.

Research on Stock Price Predictions and Market Timing: Malkiel, B. G., & Fama, E. F. (1970). "Efficient capital markets: A review of theory and empirical work." Journal of Finance, 25(2), 383-417.

• This research supports the idea that the short-term market is highly unpredictable and that trying to forecast its movement is unreliable, reinforcing the importance of a long-term approach for investors.

Eugene Fama and Kenneth French on Market Predictability: French, K. R., & Fama, E. F. (2010). "Luck versus skill in the cross-section of mutual fund returns." The Journal of Finance, 65(5), 1915-1947.

• This study discusses how many fund managers' short-term performance can often be attributed to luck, further illustrating the unpredictability of short-term stock market forecasts.

Strategist data: https://bilello.blog/2024/7-lessons-from-2024