IFs of LIFE

Eng. Afsar Ali. Z

Wednesday, January 25, 2023

The impact of an unexpected crisis can have devastating effects to your family financially. You work far too hard to accumulate wealth over time only to see it disappear due to circumstances you have no control over. Because there are things beyond our control, it is important to have a comprehensive financial plan.
You also might need to change how you think about your money. When times are good and people’s confidence is high, people tend to focus on spending and investing in risky investments. During the good times, their plan might mean having all their money in the hottest stock that they cash out when needed. Often, that spending, and investing is played out over a shaky financial foundation that does not include a strong money protection plan with income protection and life insurance. If this sounds like you, you need to ask yourself: "If I make money, how can I protect what I'm earning so that I have fewer restarts in life?"

Each time you restart in life, it takes time and money to get back to where you were. The age-old adage of investing in aggressive investments while you are young because you have time to weather the storms needs to be adjusted. Each storm leads you down a path of self-discovery for the better or worse. Having money to weather the storms makes the journey easier so you might come out of the storm stronger and better.

When it comes to planning for the "what-ifs" in life, people insure their cellphones, homes and cars, but rarely do they insure the money maker who bought those items, which means insuring the income they earn.

Most professionals and business owners I meet overconcentrate their wealth in one asset class: their job, their business or stock in the company they work for. This is understandable. The income from your job is a 100% return on yourself. Reinvesting in your own business can potentially yield a higher return than any stock or other investment can produce. When you work for a company in which you own stock, you likely have confidence in your work, which could mean confidence in your stock.

However, it also means you are exposing yourself to extra risk if something happens that makes the company's stock go down and causes you to lose your job. So, it's prudent to diversify some of your savings to uncorrelated investments or accounts.

You need to think of building your financial plan as something like building a home. Having a strong foundation helps the structure of your home stay intact during storms. It's the same thing with your money. An emergency fund and an income protection plan are critical to withstanding storms in the market, job losses or personal health events due to illness or sickness.

Having a solid foundation for protecting your income and family will also give you more confidence in investing in stocks, bonds and real estate that ebb and flow with the market. However, it is important to diversify your holdings not only in different types of stocks, bonds or real estate, but also to consider assets that may be uncorrelated to the market, such as annuities and permanent life insurance. Far too often, people overconcentrate in one area of their investment holdings because that area is what they know and what has been working for them. I think it is safe to say that time and time again, crises have impacted portfolios, no matter how diversified they were. Therefore, it's prudent to open your mind to other vehicles that can potentially withstand these financial storms. Diversification in your portfolio and diversification of asset holdings can help reduce the risk in your portfolio and potentially give you a better chance to weather financial storms.

Lastly, focusing only on returns can distract you from taking action to accumulate real wealth. The challenge is returns don’t equate to money in your pocket if you've never really had an exit strategy for your money in the market. Therefore, you might just be sitting at home entertaining yourself by watching your stocks go up and down. What can help is having intention for the money you are investing.

For many reasons, people often don’t think about creating a comprehensive plan for their money. But a crisis like the one we're experiencing can be an impetus for thinking about your money differently — and for the better. Have an open mind to a comprehensive financial plan. It might save your hard-earned money. If you weren’t prepared for this recession, how will you protect your money for the next one?

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Eng. Afsar Ali. Z (Risk Management Specialist)

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