Your money in the age of uncertainty
After a decade of steady growth, the financial forecast shows signs of turbulence ahead. How will you avoid knee-jerk reactions when your wealth plan gets rattled?
He was 72 and he had never seen so much money simply disappear. He looked at his statement again and — was he reading it right? Yes, it said his account was down $12,000. In one month. He saw on the news that the stock markets were having a troubling time but . . . this took his breath away. All these years of building up his construction business and the money he and his wife saved can simply vanish.
He composed an email to his advisor, half-joking that he hoped that there had been some mistake. He explained that he and his wife were simple people and didn’t understand the investing world but, maybe it would be best if they sold all the investments related to stocks and just relied on cash for the rest of their lives.
If you also feel like panicking about something, you have a wide variety of things to choose from these days.
The global political climate may feel more unsettled than usual, with ongoing trade wars, discontent over Brexit in Europe, a seeming return to Cold War tensions and a stock market showing signs of volatility. Interest rates have risen, and a robust economy from 2018 suddenly feels shaky in 2019. Nobody knows what’s around the corner, but if you’re already feeling unnerved, it can only be more bad news.
Anxious times can lead to uncertainty over your money, second-guessing your future plans and wondering where you’re going to be down the line. This could be when the ‘what ifs’ arrive: What if you can’t retire when you want to? What if the economy tanks and your savings cave in? What if you lose your job or get sick, and you are forced to sell your home? What if you run out of savings at 85?
If you’ve got a bad case of the ‘what ifs’ that’s understandable. But it may also be counterproductive. Making a rash decision in the emotion of seeing a portion of your recent gains disappear may lead you to a course of action you could come to regret. Before you take action, here are some points you may want to consider:
Create a plan for all seasons
Tannis Dawson suggests that you shouldn’t let the ‘what ifs’ drive your action. The High Net Worth Planner with TD Wealth believes that trying to run away from problems and fleeing investments on a whim can lead to even greater problems. While no one has a crystal ball, she helps build wealth strategies that aim to protect against bad times as far as possible.
Dawson explains that while a crashing stock market and downturns in the economy may be unwelcome and can panic those who have never experienced anything like it before, cashing out during volatile times may cause you to miss a market recovery. Stocks and mutual funds don’t grow in straight predictable patterns. If you review the major market indexes after the pullback in 2001 and 2008, the market has always recovered. In the same way Canadians can be sure there will be a nasty snowstorm every winter, no one can truly predict what day it will come nor how much shovelling we’ll be doing. Same for the stock market. There will always be a downturn, sometimes severe, but no one knows the date. Yet the market rebound that follows may push it to new heights.
Major market dips and recoveries
She says that if clients are worried throughout this period, want to know how well their plan is insulated from volatility or just want to confirm their plan is still on track, just contact their advisor and chat.
“When an advisor meets with clients, they typically say, ‘We planned for this, and we design your plan to help deal with this,’” she says.
A good plan … offers perspective
If you have been used to steady growth in your wealth plans for a decade, losing a portion over two months can be plainly shocking. But Dawson says that this can be a dangerous time to make a move. For example, if you have 30 per cent of your portfolio invested in equities, you may feel highly motivated by a sharp loss to sell and transfer the funds into seemingly safer type of investments, like cash or GICs.
But Dawson says that kind of move could make the problem worse because, while someone may have suffered a loss on paper, selling can crystallize that loss thereby eliminating an opportunity for the investment to rebound. Moreover, once a growth cycle starts again, leaving money in cash means that an investor can’t take advantage of the market recovery.
“I tell people, ‘If you’re not in the market if it takes off again, you could miss that growth,’” she says.
And she points out how people can put minor turbulence into perspective.
“If clients are years away from retirement, advisors typically tell them, yes the market has gone down but you likely do not need access to those retirement savings right now. Time can help investments rebound from their lows before most investors need the money,” she says.
And for people who are retired, if they have a good wealth plan, they usually have two to three years’ worth of living expenses in cash or low-risk investments, which will likely not be impacted by a market downturn. Therefore, any growth investments can have time to recover.
Perspective is important, she says, because people often fail to recall the times when they were enjoying above-average growth, thinking any recent good times were the norm. She reminds people what should go into making a wealth plan in the first place: a plan with a personalized standpoint, one that needs to evolve as people do and one that is based on reality, not rose-coloured glasses.
A good plan … is personalized
In order to avoid a cookie-cutter plan that is ill-suited to your individual situation, your plan should be customized to who you are, what your situation is, and what you want in life, says Dawson. Advisors will sit down and discuss and discover what people want to do with their money — whether it’s retiring at age 59, buying a sailboat for the cottage or planning a rich legacy for your grandkids.
The process of building a plan is also a great opportunity for a course correction if your current lifestyle is not matching your savings goals. For instance, if you are not putting enough money away when you’re 40, it is likely better to make a small adjustment now than have to make a much bigger adjustment when you’re a few years away from retirement.
Part of this discussion is determining your risk tolerance, which means what kinds of investments are appropriate for you and your goals. For instance, while cash is the safest type of investment, its low-growth characteristics may not be enough to reach your end-goals. Others may dislike the ups and downs of higher-growth investments. Usually people can choose a happy medium between both extremes.
Plan realistically and change the plan when necessary
A plan is built on a foundation of precise data on what you have and where you want to go with it, says Dawson. While we might all love to buy an island in the South Sea when we retire, simply wishing for it won’t get us there. However, exact details on financial obligations, cash-flow, savings, and aspirations for your wealth can allow a realistic plan to be built. It may not let you buy an island, but it could determine if you can visit and how the nice the hotel will be.
As an example, Dawson points to one of the greatest disparities people often have in their plans: their spending estimations in retirement. She says many clients believe they will be able to live on 75 per cent of their previous lifestyle costs, or even less. In reality, many people spend the same amount. The reason? Most newly-retired people have more time and enthusiasm for doing things they never had time to do when they were working (like enjoying a luxurious European vacation), which can eat into their savings even if they are spending less day to day. With this in mind, Dawson urges people to be realistic with their future spending, and all their forecasting estimates, in order to help make a more accurate retirement plan.
Few of us go through life without changing our priorities as life progresses or as events like starting a family bring their own urgency to how we run our lives. Both positive and negative changes must be reflected in your wealth plan since how much you can ultimately save, the time horizon for your savings and what you want to use the funds for must reflect your current, not previous, situation.
“People never know what life event is going to hit them,” Dawson says.
It all comes down to trusting the plan
Dawson says talking to your advisor can help bring perspective and reassurances you are on the right track. And if someone doesn’t have a wealth plan, talking to an advisor about how they can help may bring some clarity to what needs to be done about their finances.
She says that while news from the world or financial markets may be unsettling, she tells people they can learn to tune out the noise around them and focus on their long-term plan, which may be shielded from the short-term volatility of the markets.
Overall, bear in mind that generations before us faced economic turmoil, political stresses and international conflicts, and so may generations after us. We, along with our wealth plans may get rattled, but in the end we may need to re-adjust, reset and carry on.
“While the short-term results may be disappointing, the long-term view may show that recent history is just a blip on the road in seeking to achieve their goals,” says Dawson. “Don’t make rash decisions — it’s often why you have an advisor in the first place.”
— Don Sutton, MoneyTalk Life