Humans do not like uncertainty, and change inherently carries varying degrees of it. The rate and pace of change – and hence uncertainty – in our world today is unprecedented. It is quite literally staggering. And our brains have not evolved, past our first instincts, to deal with it. When faced with the potential changes forced on us by climate change, artificial intelligence or the demise of political alliances our first, and very human, reaction is anxiety.
Some of these changes hold very real threats to our wealth and wellbeing. We could lose our jobs to human-like computers. We may have to endure long droughts or food shortages as a result of climate change. We may face WW3, a version of warfare quite unlike anything we have seen before.
So, what can we do? How do we respond to change rather than react to it? How do we protect our well-being? Just like ancient towns needed walls with drawbridges and castles had moats filled with water to protect the inhabitants against the onslaught of their enemies, we need to create a modern version of a moat around our wealth and well-being.
Here’s how you can protect your financial capital:
- Build a liquidity moat. This is a time to live within your means and use your capital sparingly so that you can have a liquidity safety net. No one can forecast how the forces at work will play out. We’re dealing with uncertainties we have never dealt with in our lifetime and careers. You may need cash in your bank account or assets that you can convert to cash in a short time due to unforeseen circumstances. This is always a good idea but even more so in these times.
- Diversify your asset base. Spread your investments across different geographies and types of assets. What worked in the last fifty years may not work in the next decade. It’s as dangerous to extrapolate recent trends, as it is to forecast future trends in investment returns. It is therefore important to have diversification. This is particularly important for families who have concentrated portfolios in property or their area of expertise. Current conditions may present opportunities but if it leads to more concentration in your portfolio, beware. Concentrated portfolios of assets you cannot convert into cash is dangerous at this time.
- Focus on what you can control. We cannot control the decisions of world leaders. We cannot control the weather. We cannot control the gyrations of financial markets. More information and attempts at understanding will not necessarily lead to better outcomes for your money. In fact, the opposite might be true. However, we can exercise control over our income and spending – two acts which are the biggest determinants of how successful a financial plan is. We can control our decisions about our investments, such as how much risk we take. We can control how much and what news we consume. Focusing on controlling these personal choices is of more benefit than focusing on aspects out of our control.
- Review your financial plan for the likelihood of success in adverse conditions. Many South African retirees have already tasted the product of five years of low returns (as an aside, we do not believe that this will necessarily continue). Financial plans that did not take adverse conditions into account did not serve those people well. Get peace of mind about your plan. Look at various scenarios and know how you can react to adverse conditions to protect your capital. For example, by taking income adjustments in line with the returns on the portfolio – which means that in good times you can draw more and in bad times less – you can significantly improve the longevity of your capital.
- Protect your wellbeing. If you don’t it may cost you loss of income and/or an increase in medical bills. Protecting your wellbeing involves creating a moat of habits around you and your family. Simple habits like exercise, making time for eating around the dinner table, limiting screen time, sleep and spending time in nature can protect you and your family from the impact of stress and anxiety. Read more about this in a separate article in our newsletter.
At Foundation Family Wealth we are committed to helping our clients protect their capital so that it lasts a lifetime – but also for that capital to be used for a meaningful life, whatever that means for them. In our regular reviews with clients we address all these issues. Considering this information, if you’d like a review or a conversation to see how we can help you, contact us.