When the market takes a dive, protecting your investments seems like a single-focused strategy. However, there are other important financial moves you need to make in order to protect your entire portfolio, assets and finances. It’s easier to deal with a downturn in the market, but how do you successfully handle volatile times when it comes to your overall well-being?
What are volatile times? They could involve international disturbances, unstable employment/rising unemployment, collapsing financial markets, and frozen credit markets.
This roughly describes what happened in Greece and also the situation in the U.S financial meltdown a few years back. Volatile times also include personal emergencies like losing your job, a death in the family or a medical emergency.
So what can you do or what strategies can you implement to ensure counter-measures are already in place?
Prepare Your Income
It’s unfortunate but true that no matter how much you think it won’t or can’t happen, eventually volatility has an effect on your income. And it’s usually negative. Complicating the matter is the fact that your income is the bedrock of your entire financial situation.
How can you manage your income through volatile times?
Hold on to your current job for as long as you can. The “last hired/first fired” doctrine usually kicks into high gear in volatile times. Translated into practical terms, volatile times are usually a very bad time to make a job change. From a standpoint of financial survival, the best strategy is usually to hold on to your current job for as long as you can.
Develop a backup plan. If volatile times last long enough, your income will take a hit. Recognise this and keep your resume up to date, freshen strategic contacts regularly, and continually work to improve your skill set. You may need to make a major move in a very competitive job market, on very short notice.
Start a side business. If you have skills that lend themselves well to direct sales to businesses or the general public, you could consider putting them to work through side venture. Not only will that provide you with extra income, but it can represent the core of your backup plan in the event your current income situation should fail.
Strengthen your networks. Many people do this only when they are hunting for a new job. But the risk of volatile times should make this a continual effort. You should reach out to anyone in your industry and even people around the periphery of it. You never know where the next opportunity will come from , and you never can unless you keep your feelers out.
Modify Your Investments and Savings
There are all kinds of advice explaining how to manage your money (and even make a profit) during a volatile market or unsettled economic times. Think in terms of making modifications to your existing plan.
Avoid wholesale changes in your investment allocation. It’s very likely the asset allocation plan you have now will also serve you well in a less stable environment. There’s probably no need to take an axe to your current portfolio and rearrange the entire allocation, but have the asset class balance reviewed by a professional.
Reduce, but don’t eliminate your equity exposure. No matter what anyone says about holding through a downturn, volatile times are not kind to stocks. This doesn’t mean you should sell off all of your equity holdings. But at the same time, a little bit of trimming is likely in order, particularly if your equity allocation has been exaggerated by the recent bull market.
Emphasise and build liquidity. Cash is king during volatile times. Sure you might miss an opportunity here and there, but the main thing cash does, that no other asset can, is preserve options, and options are one of the best things to have during times of volatility. You can use cash and cash equivalents to provide a cushion against the loss of a job, pay for contingencies, or to have available to invest when the financial universe shows definite signs of settling down.
Evaluate Debt and Credit Needs
The deeper in debt and the more credit dependent you are, the worse things will go for you during times of volatility. Try implementing these strategies now, while the situation is still quiet.
Don’t take on new debt. It’s usually best to avoid taking on new debt this late in an economic recovery. Debt is intimately tied to the good times, but if you will be required to pay it back during volatile times, it can be an unbearable burden.
Pay down existing debt. This is an excellent time to begin reducing any debt you already have. Any debt you can reduce or eliminate will lighten your load if and when things start to get ugly.
Convert your mortgage to fixed rate. If you already have a fixed-rate mortgage, you can ignore this one. But if you are carrying an adjustable-rate loan, you’re living with the very real risk that the rate can go higher, maybe much higher, when the financial markets turn ugly.
Convert any other loans you have to fixed rate. This is especially true of credit card debt. Many credit cards have a default rate that goes as high as 30 percent, which can kick in just from making one late payment. Maybe you’ve never made a late payment in your life, but if times get bad enough, you will, sooner or later.
Do your best to become self-financing. Accessing credit quickly and easily is a practice you might want to eliminate. Volatile times often bring about freezes in the credit markets, meaning you won’t be able to borrow money at any price. You should begin preparing now for that possibility.
Watch Your Lifestyle
Your lifestyle represents the demand side of your financial situation. This is because how you live plays a central role in how you spend your money. You can make changes in your lifestyle that will help prepare you to have an easier time when volatility arrives.
Gradually remove yourself from high-cost habits and hobbies. There are a lot of low-cost ways to entertain yourself, but that never stops people from going the other route. If you have high-cost habits and hobbies, you can start now to transition over to those that are not nearly so expensive.
Avoid the urge to trade up. It’s something of a cultural norm in America for people to trade up every few years. Whether it’s a house, a car, a computer, a TV or a smartphone, people are ready to trade up after just a few short years. But while trading up not only costs money when you do it, it usually also leaves you with higher recurring costs. Trading up will not serve you well in times of volatility.
Become more self-reliant. You can do this in a number of small ways that can have a big impact on your life and your finances. For example, you can learn to do simple repairs around the house or on your car. You can also become more proactive in managing your health, or even learn how to grow some of your own food. The impact of these efforts will not only lower your living expenses but they can also give you a greater sense of confidence and independence. That always comes in handy during volatile times.
Emphasise relationships over material things. Good times are often when people spend much of their time and money accumulating stuff. But when times get tough, people become much more important than merchandise. If you think you might be addicted to material possessions, now is the time to begin making the transition over to building stronger relationships.
Adjust Your Attitude
Contact NEBA Wealth Management today and let us guide you along the path to financial freedom. Email: enquiries@nebawealth.com or Call: +60 3 6206 2183
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