Finance Your financial plan Next, you’ll want to take a look at your “big picture” finances. Your goal here should be to determine whether the downturn has caused you to re-evaluate your long-term goals and financial strategies. Ask yourself: what’s changed? Naturally, a market downturn or correction can have a direct and obvious impact on your portfolio. But it can also have important implications on other aspects of your finances, and your life too. So, whenever you find yourself in a market downturn, make sure to ask yourself how your long-termfinancial goals have changed during (or because of) the downturn. Has the correction exposed a financial vulnerability which youmay not have thought about before − perhaps an over-reliance on your portfolio when it comes to income? Has the turmoil caused you to reconsider or re-evaluate some of your financial goals, or the timing for achieving them? Maybe it hasn’t − particularly if the downturn turns out to be relatively short-lived. Fair enough. But you won’t know for sure unless you take the time to look beyond the day-to-day headlines and revisit the ideas and goals behind your larger financial plan. Check your diversification Diversification is an excellent way to protect your portfolio from market turmoil. By putting your financial eggs in different baskets, you protect yourself if any one of them “cracks.” But diversification is often one of the first casualties of that turmoil. As some investments perform better (or worse) than others during the downturn, your overall allocation can become out of balance with your personal risk tolerance and/or your long-term investment goals. After a downturn, you’ll want to take a close look at the allocation of stocks, bonds and cash in your portfolio. Is it nowmore weighted to a particular sector or geographic market than you originally intended? After looking things over, you may decide that you don’t need to take any action − at least, not yet. And that’s fine. But remember that things can change quickly throughout the course of the downturn. A portfolio that is holding up relatively well during the initial sell-off can become significantly “out of whack” with your target allocation the longer the downturn lasts. Get your emergency fund in order Buy high, sell low: not a recipe for investment success. But that’s exactly what you may have to do if you’re forced to draw on your investment portfolio for income during the middle of a market downturn. That’s why savvy investors take care to build up a “rainy day” cash reserve as a potential source for funding living expenses or other costs at a time when selling investments simply doesn’t make sense. In an ideal world, that rainy day fund should be large enough to get you through a typical downturn − say, anywhere from three to 12 months of basic living expenses. If you’ve accessed some of the cash during the downturn, make it a priority to get this back in order. Take a look at debt We’ve already seen a few interest rate hikes in 2018, and both the stock market and the overall economy have kept chugging along. Rates are still a long way off their pre-2008 levels, and debt remains relatively cheap. But that could change. Both the Bank of Canada and the U.S. Federal Reserve have been clear that further rate rises are in the cards. This means that it’s a good time to do a “debt inventory,” and consider how rising rates may affect your portfolio (and your overall finances) during a downturn. Howmuch of your monthly income currently goes to servicing your debts (mortgage, credit cards, car loans, etc.)? What if interest rates rose by, say, 1% over the next year? What about 2%? How would that affect your ability to pay your debts? Would it impact your lifestyle in any way? Sure, these are “what if?” questions. But even a small uptick in the rate which you’re charged on a loan can dramatically affect the amount of principal that gets reduced by every payment. If you’re not paying attention, you could easily find yourself facing a significant challenge with your debt in a very short time. CSANews | WINTER 2018 | 33
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