Tags: Coronavirus | coronavirus | after | effects | future | financial | plan

How to Make Your Financial Future Immune to Coronavirus

How to Make Your Financial Future Immune to Coronavirus
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By Friday, 06 March 2020 08:16 AM Current | Bio | Archive

There is no shortage of information about how devastating the coronavirus can be in terms of how contagious it is, how deadly it can be, and how disruptive it can be for people through quarantine.

This article isn’t about any of that. This is about its effects to your financial plan.

The Facts About Supply and Demand

The world relies heavily on China for manufacturing. People are currently not working in factories throughout China. The overall impacts of the coronavirus in China are still being discovered. Experts are still unsure of the how many people have been infected with the coronavirus and how long it will take the population to get back to work.

When following the most fundamental rule of economics, the law of supply and demand, we see trouble in the very near future for price increases. If the demand for manufactured goods doesn’t change, but the supply becomes scarce due to an extended disruption in manufacturing, we can expect to see inflation finally rear its’ ugly head.

To date, the United States has enjoyed a strong economy and stock market for several years now, other parts of the world are somewhat fragile or downright weak. The combination of these factors could send the United States into a recession, although it might not be an extended one. That recession will probably be paired with a bear market. It has been more than 10 years since we last discussed such an event, but every economy expands and contracts over time.

How Can You Secure Your Financial Future?

How does a family, who is either engaged in discussion about a financial plan or who is monitoring their existing plan, adjust to this new dynamic caused by a global pandemic?

Dynamic Mapping for example, allows the user to focus visually on each of life’s purposes and the progress they have made towards funding those objectives. This encourages strategic conversations, like this one, rather than haggling over beating or lagging benchmarks. This method also suggests funding three reserve accounts: a contingency reserve, a bear market reserve, and an inflation reserve account. These reserve accounts help to maintain the structure of the accounts that are being “aged” (a reference to how we manage allocation policy) so that they are not damaged or depleted at the worst of times.

Bear market accounts are funded by short-term US Treasuries, which is where the world goes when trouble occurs, and is built to last for 18 months (the average length of a bear market). Combine this account with the inflation reserve, which is constructed of TIPS (Treasury Inflation Protected Securities), dividend paying stocks, and commodities, and you have a pool of assets available to help offset the increased cost of living due to inflationary pressures. Once the bear market has receded, and inflationary pressures have subsided, the family can resume their normal accumulation or distribution activities of the Dynamic Map.

The Significance of 'Aging' a Portfolio Cannot Be Understated

Many compare this idea of gradually reducing risk as the distribution date approaches to that of target date funds. The difference lies in our complete disregard for the diversification benefits of sub-asset classes. Many portfolio managers are of the belief that small-cap stocks behave a little differently than blue-chip stocks and international stocks behave differently than domestics. The diversification benefits completely vanish when you need them most!

When a meltdown happens, like the dot-com crash or the credit crisis of 2008, all these sub asset classes correlate to “1” and behave exactly the same way. They go down hard. If the investor becomes extremely disappointed by losing their downside risk management in this way, they are highly likely to make a terrible decision driven by frustration and remove these funds from these asset classes.

We suggest the aging process remain focused on moving assets out of stocks (any stocks) and into less risky categories like bonds and guaranteed programs as the distribution date nears. This method has proven to manage the fears that come along with recessions and bear markets by providing the confidence that lifestyles remain intact.

Account Divisions Can Help

Most investors are solely focused on their overall return from their investment accounts. Those accounts include their 401(k) account and their personal savings/brokerage account. We suggest slicing these down into more accounts. Each account should have a unique name, with a unique purpose. Each of those purposes will have different distribution dates. Examples might be a college tuition account (or multiple college tuition accounts for multiple children), a retirement savings account, an account to fund your child’s wedding, an account to launch a business in the future, etc.

It is unfortunate many custodians tack on an annual fee to these accounts, but the benefit would be how well we can withstand the pressures of unusual events like a world-wide coronavirus outbreak.

Still, a reliable financial plan can help families make strategically sound decisions with their assets during stressful periods, or events, like the coronavirus outbreak. Serious investors recognize the significance of applying the principles of risk management to their investment portfolios while applying those assets to specific life purposes.

Jeff Mount is president of Real Intelligence LLC. Jeff has been active in the financial services business for the last 25 years. His unique skill set includes sales, sales coaching, strategy and client service modeling. In 2008, he created a very unique training program, which is now called the Essential Family Office, which has helped financial consultants achieve significant growth of their assets under management and in a more scalable format. On average, these consultants saw an annual increase of $28 million in new assets under management in the first year upon completion of the training.

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How does a family, who is either engaged in discussion about a financial plan or who is monitoring their existing plan, adjust to this new dynamic caused by a global pandemic?
coronavirus, after, effects, future, financial, plan
Friday, 06 March 2020 08:16 AM
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