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It’s too early to say when we can stop sheltering in place, but I’m finding that pretty much every (virtual) conversation I have with my clients, staff, friends, and family is starting to revolve around the big unknown: What is the world is going to be like when we get back to some form of normal? The scary thing is, we’re all anticipating a murky road ahead.
Throughout my career as a financial advisor, I’ve helped people plan for the unexpected. True, if you’d asked me a year ago, I never would have imagined a crisis of this magnitude, but I do know that even in a global pandemic, the rules of financial risk management are the same as they always are: Rather than worry about the unknown, focus on what you know and can control.
Consider, first, two things that affect you but are beyond your control: the markets and the growing federal deficit.
Stock prices are adjusted based on the expectations of earnings. If the markets expect protracted lower earning, share prices will be lower. Prices will adjust upward as the forecasts indicate momentum in that direction.
What we cannot know is the time frame; therefore, trying to guess or “play” the market is dangerous, because it’s speculating, not investing.
Meanwhile, as pundits and politicians keep reminding us, we will be left with unprecedented deficits by the time we come out of the shutdown. Deficits can be reduced only by taxes, fees, tariffs and such.
Yet a government deficit, while not a good thing, is not nearly as damaging as personal debt, because U.S. currency is backed by the government—as opposed to the old gold standard—so the government has the ability to print as much money as is needed to stay solvent.
That’s the basic premise behind Modern Monetary Theory, which, though not without controversy, gives us a tool to avoid a federal deficit disaster. All the hand-wringing and politicization about the country going into debt is good for headlines, but not too important when it comes to your own planning.
On the other hand, here are five things you can control to promote financial well-being:
1. Your current net worth: Has your net worth changed since the beginning of the pandemic?. If you’re invested in stocks, the answer is almost certainly yes. But if you’re well diversified and properly allocated, you shouldn’t have to focus on market changes. The bigger issue is debt. If you’ve accumulated debt during this period, how will you get rid of it?
Begin with a clear understanding of the type of debt, the terms (i.e. the length and whether the interest rate is fixed or revolving) and the interest rates you’re paying. While rates are down, look into restructuring or refinancing.
Unless you have plenty of unused cash lying around to pay the damned things off, work to adjust your rates downward. Every dollar of debt that you can reduce will increase your net worth by the same amount.
2. Your liquidity: If your income was disrupted during this crisis, the importance of a robust emergency fund has become crystal clear. Having sufficient reserves to pick up the slack gives you a sense of comfort that no words can describe.
If you’ve tapped into your capital without having to liquidate long-term assets, you’ll want to restore it to its previous levels or more, depending on your circumstances.
3. Risk management: Nothing illuminates what’s at risk like a crisis. Death, disability, accident, unemployment, medical costs and business interruption are a few risks that might seem all too familiar right now.
Consider how large a deductible you can withstand when it comes to insurance, but make sure you have appropriate insurance against all reasonable risks, either in the form of policies or emergency reserves. This is a call to action to make sure you’ve addressed all areas of controllable risk.
4. Investment allocations: Your portfolio should have a component for each one of your financial goals, and each calls for its own allocation criteria. Your emergency fund, for example, should be strictly in safe instruments, such as 50% in money markets and 50% in 3-month CDs or Treasury Bills, or it might be best in a simple savings account.
Your allocation for a college fund for a 3-year-old should be different from the on for a 16-year-old. Your retirement fund allocation might be vastly different if you’re 30 than if you’re 60, while the funds you are holding for unspecified investment could be completely different from your other buckets.
In determining allocation, factor in the time you have before you’ll need the assets, your ability to get through market downturns, including recessions, without having to liquidate prematurely, plus your overall knowledge of markets and comfort with volatility.
After living through disruption, this is an excellent time to revisit your investments to test these parameters.
5. Estate planning: This topic is coming up front and center these days, with the toll of unexpected deaths a grim reminder that everyone should be sure their will, their health care directives and their Powers of Attorney are up to date. It’s nothing short of unfair to those who are left behind to deal with messes that could have otherwise been more manageable.
No one knows what the next few months or years will look like and frankly, it doesn’t much matter because it will be what it will be. Take time off from dwelling on the possibilities and look at where you can make a real difference in your own financial security. Not only will you have greater peace of mind, but you’ll also have more power and resilience as this tumultuous year moves forward.
