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Back to basics: planning opportunities in times of crisis

The Coronavirus pandemic has changed life as we know it. We’ve entered the era of virtual cocktail parties and have embraced social distancing and extreme hygiene in the hope that it will slow the spread of a pathogen. As if this weren’t enough, amidst the backdrop of a global health crisis, financial markets throughout the world have reacted violently, quickly erasing trillions of dollars of wealth. Enter the brave new world of managing your health and wealth in a world filled with uncertainty. There is no better time than now to get back to the basics.

A budget is a great place to begin. It’s a bit like an Andrew Cuomo Coronavirus press conference: unfortunate that it’s necessary, but an informational lifeline with any number of useful applications. And the format is not dissimilar; begin by collecting the data and separating it. Instead of low-risk and high-risk patients, your budget is comprised of necessary and discretionary spending. Assiduously stick to the facts and use reasonable assumptions. A good budget requires that you monitor your spending overtime to come up with an accurate tally of each spending category. Try tracking your spending each month for several months and keep a watchful eye out for less frequent expenses such as vacations and insurance premiums. Prepare to make revisions. Your budget will change over time as new and better data emerges. Be honest with how you’re spending your money and use the data to identify opportunities to save additional money, fund or bolster your emergency savings, and identify expenses that could be curtailed in the event of a future crisis. 

Investment risk tolerance is another concept that is never truly solidified until a crisis occurs. There’s nothing like a twenty percent plunge in stock prices to remind us that stocks are risky. Risk, however, comes in several flavors and includes the risk of having your purchasing power eroded by inflation and the risk that your investments will not be able to be quickly exchanged for cash. Inflation risk and liquidity risk are real, but most discussions of risk focus on the likelihood of losing money. Managing investment risk can be accomplished- at least to some degree- through a combination of diversification and segmenting investments to match your time horizon. Using this method of stratification, funds earmarked for short-term needs are invested less aggressively than are those that will not be needed for several years. These risk mitigation strategies, when combined with good old-fashioned budgeting and maintaining adequate emergency savings, can help to offset some of the immediate impacts of a crisis.

It’s not all doom and gloom though, periods of extreme distress do come with opportunities for those that are ready to seize them. Realizing losses in a down market is normally best avoided, but for those with taxable investment accounts, it may be wise to capture some losses now to help offset future gains. Converting traditional IRA assets to a Roth IRA may also be wise if you share in the optimistic sentiment that this too shall pass. If you haven’t spoken with your financial advisor recently, it may be a good time to do so. A crisis can also serve as a useful reminder to review your estate planning documents or to get them in order.

In difficult times there is humility in realizing that there is an awful lot that remains outside of our control, but optimism in knowing that we’re doing what we can to stack the deck in our favor. This applies to pandemics and personal finance.

Please contact us with any questions, or if you'd like to discuss opportunities that may be available to you.

Be safe and take care.