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Is your financial life fragile or resilient? How do you know?
In order to have a sustainable financial future, you need to anticipate both good and bad market cycles. You don’t get to experience the “up” times without the occasional “down” times.
One of the best ways to avoid big financial mistakes is to expect uncertainty. If you plan for uncertainty, your financial life will be resilient. If you don’t recognize uncertainty, your financial life will be fragile.
WHY YOU SHOULD EXPECT CYCLES TO REPEAT
If you build your financial life around historic economic cycles, you won’t be surprised when they occur. Cycles are just a series of events that are regularly repeated. Almost a century of economic data teaches us that both “up” and “down” cycles are part of life. Reacting to volatile markets won’t change this fact, but it might derail your financial planning progress.
If you view economic downturns and market corrections as inevitable, you can relax. This isn’t fun, but it’s part of the ride.
You don’t need to forecast when the next downturn will occur or what the precipitating causes may be. You only need to accept that financial shocks happen occasionally and you can’t precisely know when or why.
This time around, inflation, the war in Ukraine, and a looming recession are weighing heavily on the financial markets. Next time, there likely will be another set of causes and worries.
A resilient financial life presupposes that you think in terms of years, not days. There will be days and weeks where your patience will be tested. Just remember that your best opportunity to obtain long-term returns from the market is to remain invested for the long term.
Resilience demands a lot of you, particularly when the market is going down and down. However, there is no shortcut. Stay focused on your planning goals rather than the stress of the markets.
HOW ROOM FOR ERROR HELPS
Financial resilience is synonymous with room for error. The financial things in your life rarely unfold exactly as you imagine. You need room for error or a margin of safety built into your financial planning efforts.
Famed author Benjamin Graham wrote, “the purpose of the margin of safety is to render the forecast unnecessary.” Exactly.
Room for error.
Room for surprises.
Room for ordinary market down cycles.
You live in the present, but you plan for the future. How you utilize room for error in estimating the range of future possible outcomes is crucial. It’s best to use a broad brush, not a fine line pen, in looking at probabilities and possibilities for the next 10 or 20 years.
Resiliency is the most valuable result from engaging in the financial planning process. Trying to predict the future has no part in this outcome. Staying invested throughout normal market cycles is a big part. Start there.
Related: Every Financial Choice You Make Includes an Assumption About Time