Financial Planning Competency Handbook, 2nd Edition

CHAPTER 86 Accounting for Time: Important Distinctions and Concepts for Financial Planners

John E. Grable, PhD, CFP^®

University of Georgia

Robert Rodermund, MS

Lindenwood University

The concept of time is interwoven throughout the financial planning process. Typically, financial planners think about time from one of two viewpoints. On the one hand, time is seen as an input into planning models to determine either an optimal savings or asset withdrawal strategy. On the other hand, time is sometimes seen as a constraint that limits how much risk can be taken in relation to goal achievement. Time, as either a planning input or a constraint, can be further divided. Generally, when financial planners think of time they mean a client’s investment time horizon, which encompasses the period beginning with the establishment of a financial goal up until the point of goal achievement. A client’s decision time frame is the period over which a client measures portfolio results to determine the success or failure of a given strategy.¹

While an investment time horizon and a decision time frame are closely linked, an individual’s investment time horizon tends to be longer. This helps explain why clients sometimes give up on a financial savings goal; namely, they do not see immediate results, and based on their decision time horizon, elect to alter their financial course. The built-in conflict between someone’s investment time horizon and the decision time frame is quite common among institutional ...