Monthly Archives: September 2020

Economic Collapse: A risk worth worrying about?

 

 

Economic Collapse. Yes, it’s a real risk, societies have risen and collapsed all throughout history. Each time the people thought this time was different and that they were too smart or knowledgeable to allow it to happen again. With a global pandemic shaking the world, fascism on the rise, and countries moving more towards isolation than cooperation, an economic collapse is a real risk.

 

 

The good news is it is not a risk worth worrying about. Why not? Well you can worry about it all day and accomplish nothing. The reality is it still has an exceptionally low probability of occurring. Since this is an investment related blog, let us discuss how it would impact your finances.

 

When clients discuss their investments with us, there is always that fear in the back of their mind that they might some how lose it all. A risk, which would only come to fruition due to an economic collapse so bad that our society never recovered from it. In this scenario, everything would be worthless. Yes, your stocks would be worthless, as would your house, your cash, your car, your gold, etc etc.

 

 

I like to explain this to people by using a rollercoaster metaphor about why you shouldn’t concern yourself with he risk of this happening, as you are subject to it whether you invest in the market or not.

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The real value of a financial plan

financial plans and their real value

 

The number of new clients I work with who do not have a current financial plan, or who have never had a plan is astounding. The terms financial advisor, and financial planner have for whatever reason become synonymous with someone who simply picks your investments for you, and answers other financial questions if your lucky.

 

The basis of any financial planning, or financial advisor relationship is based on having a proper financial plan. After all, how can you determine how much you should be saving, how much risk you should be taking, and how much you need for your goals, if you haven’t created a plan?

 

 

 

The value of a financial plan is simple. It allows you to make informed choices about your financials, rather than guessing. For most people, they don’t know what difference it will make to their future if they save $500 a month or $750 a month. Since they don’t know, they can’t see the value. If you can’t see the value, you are far more likely to spend that additional $250 a month than you are to save it. On the opposite end of the spectrum, we see those who are so stressed and anxious about their money that they hoard it, refusing to take on any risk, and living an extremely frugal lifestyle unnecessarily.

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The Three Primary Investment Risks

Three primary investment risks

 

When I sit down with new clients to discuss their financial goals, one of the most important parts of that conversation is how much risk they are comfortable taking. 9 times out of 10 the answer is somewhere along the lines of normal risk, or medium risk. The only reason I get this answer is because people don’t want high risk, and they know they need more than low risk. Oftentimes this is just the answer that makes the most sense to them, but they really don’t have a good understanding of what risks investing entails.

 

Today, I’m going to go over the three primary risk types of a properly diversified portfolio. I want to highlight the properly diversified portfolio part. If you are out there picking your own stocks, or you have a 20 stock portfolio, this is not applicable to you. Those portfolios are poorly diversified and have a magnitude of additional risks, with no additional upside. The three primary risk types of a properly diversified portfolio are: Economic Collapse, Emotional Capitulation, & Sequence of Returns risk.

 

Let’s start with the easiest to understand, and also the one least likely to matter. Economic Collapse. This risk is that something so major and powerful happens within the economy that you see the stock market & bond market effectively fail or drop to 0 in value. Believe it or not this is something a lot of people worry about. “What if I lose all my money???” The only way to lose all of your money is to have the market drop to 0 in value. The only way this could happen is if we have such a major event that capitalism collapses. With it, the North American economy, Europe, Asia, etc etc. This risk isn’t worth worrying about, purely because if this does play out nothing is going to have value anymore. Had you kept your money in the bank, under your mattress, or in gold bars, it wouldn’t matter. People will be fighting for survival and food and weapons will easily be the most valuable resources. In other words, if this happens, you’re screwed, but so is everyone else and there is nothing you could have done to avoid it. Only the doomsday preparers come out ahead in this scenario.

 

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