How Financial Planning Reduces Uncertainty

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Having a strategy in times of uncertainty can protect your money and keep you on track to achieving your goals. Uncertainty can stall your progress in many ways. Unexpected market downturns caused by unfathomable events, such as the Covid-19 global pandemic or the Russia-Ukraine war, are great real-time and real-life examples of how unpredictable life can be. When the world was working smoothly, abrupt lockdowns wreaked havoc on the economy leading to unemployment, dropping stock prices, low investment returns, etc. These events may have been unexpected, but the impact they had on the economy can occur again from time to time and create investment uncertainty.

Having a financial plan can reduce this uncertainty to a great degree. It can help you lower your losses or at least overcome them in the future with good investment returns. A financial plan can be a roadmap for the future. It can ease your financial burdens, prepare you for emergencies and unprecedented outcomes, and above all, give you peace of mind and a security blanket to lean on. Financial plans designed to combat inflation, recession, or depression can deliver better returns over time than making short-term decisions on impulse or out of fear. While it may seem time-consuming in the beginning, creating a financial plan can be far more time and cost efficient in the long run. If you need help with creating a customized financial plan, reach out to a professional financial advisor who can guide you on the same.

Read on to know more about investment uncertainty and how to protect your assets during uncertain times.

What is economic uncertainty?

Economic uncertainty is a time when the future is unpredictable. It can be caused by global events, political situations, or even personal circumstances. Typically, it is perceived with respect to the country’s economy and is defined by a period where the stock market plummets, affecting businesses and individuals at large. High inflation or unpredictability in anticipating the inflation rate, rising unemployment, fluctuating exchange rates, increased government debt, disrupted demand and supply chains, and other similar markers are all indications of economic uncertainty in a country. Political elections, changing party policies, wars, deaths of political leaders, etc., can also create economic uncertainty. For instance, the Ukraine and Russia war initially steered economic uncertainty in Europe. However, over the months, this has crossed borders and impacted most countries around the world.

On a personal level, losing a job or having to shut down a business, not being able to work due to a health concern, death of the primary breadwinner, marriage or divorce, etc., can lead to uncertainty, too. 

How to protect your assets during uncertain times

It goes without saying that having a financial plan is the first thing you can do to deal with investment uncertainty. Financial plans streamline your finances and align with your individual needs. They ensure you have a backup in times of ambiguity. They can also ease the burden of planning for multiple goals at once at short notice by distributing your assets over different investments and savings accounts with varying maturities and tax treatments.

If you are looking for a financial planning strategy in times of uncertaintyhere are some things you can do:

1. Create or reevaluate a budget

Creating a budget helps you plan your expenses and avoid overlapping. A budget is perhaps the first step in a financial plan that most financial advisors recommend their clients to follow. Budgeting can eliminate confusion and lapses. It ensures there are no errors or doubts, and every penny you earn is put towards a distinct purpose. Creating a budget and sticking to it can help you for the rest of your life, irrespective of the economic conditions in the country. It allocates fixed percentages to savings, investments, and essential and non-essential expenses, so you do not go overboard. It also keeps impulse buying in check.

You do not necessarily have to wait for economic uncertainty to create a budget. However, uncertain times can be ideal to revisit your budget. Often, you have a plan on paper, but you may not be following it efficiently in reality. When uncertainty arises, you can reassess your budget and find the errors in it that may be hindering your growth. When you create or reevaluate a budget, make sure that you allot fixed percentages to different categories like savings, investments, and expenses. Savings can be accumulated at the bank or in short-term accounts like money market accounts, liquid funds, etc. Investments can include retirement accounts like the 401(k), Individual Retirement Account (IRA), mutual funds, stocks, bonds, and other options. Finally, your expenses can be divided into two categories – essential and non-essential. Essential expenses can include rent, gas, groceries, health insurance premiums, loan repayments, etc. Non-essential expenses can consist of dining out, travel, shopping for clothes, shoes, hats, etc., that you do not necessarily need but may want to purchase nevertheless. This head is the most infamous part of a budget and something that most people struggle with. The more you spend on non-essential expenses, the more you may suffer in the long run. While it is justified to enjoy your life and indulge in shopping from time to time, try to be as restrictive and realistic as possible with your spending. You must also try to not compromise your savings and investments to allocate more funds to non-essential needs.

2. Have an emergency fund

An emergency fund is a fund designated for emergencies and uncertainties. The only purpose of this fund is to help you deal with your expenses in a crisis. This could be a health expense, a home repair, dealing with theft, or covering your needs when unemployed. Financial advisors recommend having an emergency fund that can last you at least six to eight months without a salary. Such a sum can be helpful in most situations and help you pay for essential expenses like health insurance premiums, food, gas, sanitary and hygiene products, and others.

While having an emergency fund is critical at all times, its role is further heightened in the case of economic or investment uncertainty. An emergency fund can offer you peace of mind when things go south. Irrespective of whether you use it or not, the fact that you have some money to depend on can be reassuring. Another way that an emergency fund helps you during times of uncertainty is by limiting the need for debt. Most people resort to taking on debt when they lack money. While debt can help you cover your immediate goals, it may not be ideal for your long-term financial health. The high-interest rates of debt ultimately tend to tower over your savings and investment returns. Combined with other factors like inflation, debt can be a significant liability for you for years. As long as you have a solid emergency fund, you will rarely feel the need to take on bad debt.

3. Invest for the long-term

Investment uncertainty can be hard to deal with. It creates doubt about the future and fear for the present. However, in many cases, it is unavoidable. All investments carry some amount of risk that can cause uncertainty. Even if there is no economic or political upheaval, the markets work cyclically, where the peak is followed by recession and depression. As you go through these cycles, your investment will generate different kinds of returns ranging from extreme highs to extreme lows. Watching the graph move up and down can be alarming and result in panic. However, the trick here can be to wait and watch. A tried and tested strategy in times of uncertainty has been to invest for the long term. Long-term investment can offer several benefits. Firstly, it takes away the need to time the market. Long-term investing is more about trusting time and taking advantage of it while you sit back and relax. Instruments like mutual funds work on the power of compounding that delivers the best returns in the long term. The power of compounding reinvests your profits back into the market along with the principal investment so you can earn greater returns. The longer you stay invested, the more your money compounds. Long-term investment can also be more tax-efficient in terms of the taxation of capital gains. Short-term capital gains are taxed as your ordinary income. The income tax rate for this can be as high as 37% if you fall in the highest income group. However, the tax rates for capital gains tax range between 0%, 15%, and 20%. This can be comparatively low, so you can save money by investing long-term.

4. Do not panic

Fear is a natural reaction to an unexpected situation. This often coerces investors to sell their investments in a state of panic. Panic selling is defined as a situation where investors start selling their stocks out of the fear of declining prices. However, panic selling is never the solution. Panic selling stems from alarm and creates an imbalance in the stock market, further worsening situations. It is important to understand that the losses are more often than not in your mind. If you ride out fluctuations and give your money enough time to recoup, you may not necessarily suffer from these losses. As stated in the previous point, long-term investment can be the ideal approach to maximize returns and minimize losses. It can also eliminate the need for panic selling.



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5. Diversify your investment portfolio

Diversification is an excellent strategy in times of uncertainty as it distributes risk across asset classes and sectors. Diversification refers to allocating your money to different types of asset classes, sectors, and industries so that if one investment plummets, the other can stabilize your returns with profits. For instance, if you invest in sector or speciality funds that concentrate on a particular sector, your future financial security will depend on the performance of one sector. If this sector performs well, you will be able to benefit. However, if it does not function optimally, your future may be in jeopardy. This way, you end up exposing yourself to stock market risk, asset concentration risk, and above all, non-diversification risk.

Having a diversified portfolio can help you lower investment uncertainty by offering a bunch of securities to rely on. For instance, stocks are volatile, so you can add some bonds to lower their risk. Likewise, if you invest in large-cap stocks only, you can consider adding some small-cap stocks to enhance the potential of your returns. Limiting your portfolio to a small section of the market can derail your plans at some point. But optimal diversification can lower the chances of extreme highs and lows.

6. Get professional help

If you are still not sure of how to protect your assets during uncertain times, you can hire a financial advisor. Financial advisors have professional experience of dealing with several unexpected situations that can negatively impact your financial plan. Financial advisors can ideally add value to your financial planning process at any time. However, you may feel a particular need to consult with them when things are not at their best. Times like high inflationary periods, recession, etc., may require little tweaks to your investments. For instance, many experts recommend shifting to Treasury Inflation-Protected Securities (TIPS) during inflation. This is just one example, but a financial advisor can help you make several other similar financial decisions to ensure that your future goals do not take a drastic hit.

When hiring a financial advisor, it may help you to take a proactive approach and get in touch with one as soon as you notice signs of economic uncertainty. A lot of people wait for the worst to happen before they start acting. This may lead to the loss of crucial time.

To summarize

Economic uncertainty can affect different people differently. It may also be influenced by your personal and professional situation. For instance, if you were in a stable job during the Covid-19 pandemic, you may not have suffered as much as someone who lost their job. Steady income can help you deal with low investment returns and inflation. Similarly, if you lost your job but had an emergency fund to keep you afloat till you found a new one, you would be better off than several others. These little measures can surely tone down the level of uncertainty and help you recoup sooner. So, try to pay attention to them when creating a financial plan.

If you need more help on how to protect your assets during uncertain times, use the free advisor match service to engage with a professional financial advisor, who can help create a financial planning strategy to manage unforeseen events. Based on your requirements, the service matches you with 1-3 advisors suited to meet your financial needs and goals.

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The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice.
A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.