How to plan for your financial goals in times of crisis

Planning for your financial goals during a crisis might seem silly given the tremendous amount of responsibility that’s just landed in your lap. However, as the ol’ saying goes, “Never let a good crisis go to waste.” I thought I’d give you my perspective on how to use this time to set yourself up for future financial success.

Have the Right Mindset

If you are interested in the topic of planning for your financial future you are either starting from square one, or you’ve been on your financial journey for a while and just faced a serious setback. Either way, having the right mindset will help.

The right mindset includes, but is not limited to:

• Setting realistic expectations for the future
• Being patient
• Understanding that building financial resources is a process with periods of progress and regress

Be realistic about what the future holds. We don’t know how this particular crisis is going to unfold, so don’t get caught up with strongly held beliefs that it’ll be over soon or that it’s going to last forever. The current crisis will end, and it’s going to change our way of life (either a little or a lot), and we’ll come out of this at some point down the road. Either way, I don’t think these outcomes should weigh heavily on you because your plan needs to be built on an understanding of the past.

Understanding the past is a great way to guide your perspectives of the future. Financially speaking, there have been numerous periods where financial markets have cratered only to rebound to higher levels. The worst period being the great depression. Periods of significant regress have led to future prosperity because we as a species are interested in progress. We all want our world to get better, and entrepreneurs are working hard to make our desires a reality.

But, you’ll have to be patient.

Patience is a key personal character trait in building sustainable wealth. When you consider the effects of a compounding program, which any good wealth building program is based on, you quickly realize that a good amount of the ultimate gains are built on the back end of the program. It’s how compounding works.

To put this in a clearer example, imagine a pond that starts out with one lily. The lilies will double every day until 30 days later when the entire pond is filled with lilies. This is important because of the mathematical properties of compounding. For those statistically inclined, you’ll realize that the pond was half full on day 29 (it doubled between day 29 and 30 to fill the pond). It took 29 days of doubling to get the pond half full, and then one day to fill the other half. That’s the power of compounding. You need to start early, but the benefits really kick in on the back end. For this program to work, you’ll need to be patient with your portfolio and one way that I know how you can accomplish that is to diversify your investment commitments.

Diversify

If you study financial history a little further, you’ll realize that there has historically been a premium return that you receive from owning stocks compared to other asset classes (cash, fixed income and real estate). The evidence is significant and quite robust. Because of the evidence, there is a strong belief amongst the financial community that you should have a material amount of your wealth in equities to benefit from that historical premium. It’s a philosophy that I share.

However, this crisis and all the past crises highlight the benefit of diversification. Imagine that your portfolio was 100% in a diversified basket of equities going into this current equity market downturn, and for fun, let’s say that you had $1,000,000 in your investment account. You would’ve seen your portfolio drop by almost $300,000 depending on the stocks that you owned (in six weeks). Six weeks would’ve seen you lose $300,000. That hurts.

If you had additional diversification in your portfolio, not much, but let’s say instead of 100% equity exposure you had 80% equity exposure and 10% cash and 10% fixed income exposure. Well your equities would still have been down, but your cash holdings would’ve stayed at the same level and your fixed income would’ve been down much less than your equities. Meaning that $300,000 loss might’ve been closer to $250,000 or $225,000. Significant reductions in risk can be created through proper diversification.

If you experienced a decline in your portfolio that was much too uncomfortable to handle, then you likely were taking on too much risk. I hope that you didn’t sell out your portfolio and park the money in cash to preserve what was left. That’s the opposite of what you want to do. You don’t want to buy high, and sell low. The key for you moving forward will be to have a frank discussion with your advisor about risk, specifically, how much you are willing to take. Diversification should be at the forefront of that conversation. Specifically, how much of your investment portfolio should be allocated to cash and equivalents, fixed income, equities and real estate.

Now that we’ve now addressed two important components (mindset and diversification) that you’ll want to put in place in order to plan your financial future during these difficult times, what should you do next?

What’s Next?

Your next step from here is to implement these tools into your financial process. If you currently work with an advisor you’ll want to ask some questions about financial history (rates of returns on different assets classes, variability of those returns, etc). If you are working on your own, you’ll want to write down your philosophical approach to investing and how you’ll diversify your portfolio. Importantly, you’ll want to also write down how you are going to stay committed to your plan when things get dicey.

Additionally, if you are interested in a sounding board to review your current situation, or would like to discuss how to get started on your wealth building plan, send me an email to kurt.lucier@raymondjames.ca with the Subject line: Free 15 Minute Conversation and a brief description of your situation and we can set up a quick complimentary 15 minute phone call or zoom video conference where we’ll discuss your current situation and how I might be of service.

To your financial success!

Sincerely,

Kurt Lucier, CFA

Information in this article is from sources believed to be reliable. However, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, Kurt Lucier, and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member Canadian Investor Protection Fund.