The recent dip in the market followed one of the longest runs in history for positive returns. Many investors may not yet have experienced the emotions that come hand in hand with a market downturn and may not have been financially prepared to deal with a significant (albeit hopefully temporary) drop in income or net worth.
To avoid market events impacting our life goals, we should have a financial plan and our basic foundations in place. For many, these steps are not revelations, but they are often not prioritised. Investing is often the step people want to take first – it feels exciting emotionally to be investing in the markets and generating positive returns. However, not taking the time to do the proper planning first can result in unforeseen outcomes.
In this article, we look at what steps we can take to ensure we are prepared emotionally and financially for market dips and periods of recession.
Get Rid Of Or Reduce Debt
Debt doesn’t go away if you lose your source of income. The past decade of cheap borrowing has led some people to accumulate significant amounts of personal debt. If you lose income during a downturn, still having to pay the debt could lead to added emotional stress and be detrimental to your financial health. Try to commit to not taking on any further debt and maybe consider paying down any existing. The quicker you pay this down, the quicker you have more money to put to better use.
Having a cash buffer will ensure your lifestyle is not immediately impacted in the short term if anything were to happen. While some people indeed have no choice but to live month to month, we should do all we can to build an emergency cash fund of at least 6 months of essential expenditure. If you do not have this now, ask your self what sensible adjustments you can make in your spending.
If you can be comfortable in the fact you have enough cash to last you for at least 6 months, you are less likely to react to markets emotionally.
Many people put off getting insurance thinking ‘that won’t happen to me’, but recent events have proved that job losses and health risks do actually happen and are non-discriminatory.
The reality is that if we do not have sufficient life and health insurances in place an event causing a loss of income can have substantial financial implications for you and your loved ones. Especially in places like Hong Kong, where access to healthcare quickly can be expensive if you want to have private treatments.
Multiple Income Streams
If your job is your only source of income, a cut to your salary or a lay off could pose a real threat to you and your family’s lifestyle. By having multiple sources of income, you can be sure that if something was to happen to your primary source of income, you wouldn’t be left with nothing. Rental income from investment property is a common second source of income, but this could also come from income-producing investments and businesses. Or maybe even doing freelance work in line with your skills.
Live Within Your Means And Be Emotionally Ok With Less
A market downturn may mean we can buy less stuff and have to make adjustments to our life. If we are living within our means, this impact will be much less felt.
Be willing to accept that money isn’t everything. It is just a flow and a facilitator for you to do the things you want. A short-term reduction, or pause, in accumulating material wealth should be seen as exactly that. The physical health of our self and loved ones is much more important at this time.
While we should maximise opportunities for growth during good times, we should be prepared for the fact they don’t last forever, so that when the time comes, we don’t make emotionally driven decisions. The good news Is that bad times do not last forever either. It is proven that investors who can ignore short term market fluctuations have the most success.
We can’t control the markets, but we can control all of the above practical steps. Having these in place will give you the peace of mind that you can ignore the short-term market news and concentrate on the things that really matter.
Do you feel you should be taking the above steps but keep putting it off? Pyrmont’s Life-Centered Financial Planning approach can help save you time and money by making your financial life simple.
Contact us today to find out more.