Planning for Financial Crises

Financial downturns are a fact of life no matter where you live. No economic system is immune to economic crises as can be seen by a quick scan of recent history.

And yet, most of us are averse to the harsh change that economic peaks and valleys bring. We long for stability. Economic hardship is known to be one of the most stressful environmental changes we face during our lifetime. Knowing that economic shocks are not a matter of “if” but “when”, what can you do to minimize the chance that a financial crisis could devastate you and your family?

Know that it is impossible to predict financial crises

With all of the data available to investors and analysts today, we still have yet to develop a fool-proof early warning system. There may be warning signs but nobody can predict with 100% accuracy when a financial crisis will occur.

There are some phrases that you might make note of if you happen to see them in financial media. Things like:

• “It’s different this time!”
• “There’s literally no limit to how high the market can go!”
• “This is a new investment that’s recession proof.”
• “Frankly, I’ve never seen such a strong stock market.”

Just as bad are pundits what constantly warn of an impending economic collapse. They are using their ability to broadcast information to gain attention and are best ignored.

People over 50 years old have already lived through numerous recessions and severe downturns. 2008 is the freshest in our minds but what about 2001? 1973-1975? 1980? 1982? The early 1990s? That makes quite a few events in a relatively short time. At this point, people who have lived through these events have enough past experience to know that ups and downs are part of the landscape and predicting shifts or timing the market is only successful among professional investors about 7% of the time. (check out Chapter 17 of my book for a primer on how markets actually work and what you need to know to manage through the ups and downs that are a natural, normal part of the process)

The problem is, if you wait until you feel things starting to become uncomfortable, it is probably too late to “catch up” on reserves in case of an emergency. A much better plan is to get with a qualified financial advisor and build a plan to account for the inevitable fluctuations that will come.

Be ready to answer the question, “What if I lose it all?”

One thing that completely paralyzes people is the thought of losing everything financially. Nobody wants to think about how they would pick up the pieces in the event that they lost everything. People who have gone through it can tell you that it is not very pleasant.

Because it is so unthinkable, a useful exercise is to look at the possibility straight in the face and make a plan on what you would do if such an event occurred. If you are working with an experienced financial planner, it is possible to organize your affairs and investments in such a way as to virtually eliminate any real possibility that you even could “lose it all”.

Save in the good times

In recent years, the price of oil dropped to record lows and the effect was devastating on the petroleum industry. Some of the hardest hit areas were parts of Texas where many smaller well  owners saw their margins go negative and what had been a gold mine became a nightmare.

One family business weathered the storm better than most others. When asked why they had not taken the hit other businesses did, the patriarch of the family explained, “We have been through this before and have gotten in the habit of spending money wisely on infrastructure and equipment in the good times. We try as much as possible to be judicious with our earnings. We put a lot away because we know the business cycle. ”

Lesson? Save in the good times.

Learn from people who flourished during bad economic times

It’s said that, as many people get rich in a downturn as go broke. Study the people that weathered the storm and see what measures they put in place to preserve their financial health. Practice their pragmatic approach to financial success.  Talk with your financial advisor to learn how the ups and downs of normal financial cycles actually work and what you can do to manage through them.

Plan for your life, not for black swan events

If you’ve read earlier posts, you know that we advocate developing detailed, long-term financial plans. Creating that plan and living by habits that compliment that plan is your best line of defense against the inevitable ups and downs in the economy.

Disclosure: Investing involves risk, including possible loss of principal, and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. The information contained in this piece is intended for information only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances.

The information and opinions expressed herein are obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital. Opinions expressed are current as of the date of this publication and are subject to change. Certain statements contained within are forward-looking statements including, but not limited to, predictions or indications of future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. Indices are unmanaged, do not consider the effect of transaction costs or fees, do not represent an actual account and cannot be invested to directly. International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and different accounting methodologies.