The Only Certainty is Uncertainty
Investment Planning for an Uncertain World
The only certainty is uncertainty. Emerging risks and opportunities are developing on a continuous basis around the world due to shifting sentiment and policy. Whether it’s strife in the Middle East, tensions with Russia, one country policy with China, or the ever-shifting balance of power between global powers, this much seems obvious: we live in a time of both unprecedented global complexity and the technological capability to watch events unfold in real time.
Investing in a Time of Geopolitical Risk
When large investment houses start talking about geopolitical risk it’s probably a good idea to take note. Brexit, our own elections, and other protectionist attitudes around the world are signaling a potential slowdown in the march toward globalization. Some money managers may not spend time discussing the possibility that foreign policies between countries could lead to destabilizing situations, but at the end of 2015 the chair of RIT Capital Partners (a $3.5 billion fund) issued a statement that geopolitical risk was “…as dangerous as any time we have faced since World War II…”.1
Whether such a dire warning sounds overly pessimistic or not isn’t necessarily the point. What’s important is that it reveals that large money managers are paying a great deal of attention to global risk.
But how to address these risks? Historically, moving 100% into cash or government bonds hasn’t been the best way to achieve growth throughout that last 100 years or so, a period of time that has seen more than its fair share of global instability. Without moving into purely defensive investments and making overly-conservative plans how can you plan for tomorrow while being mindful of risks today?
Managing Risk - and Reward - for Potential Long Term Success
It’s often said that without risk there is no reward, and when it comes to financial planning this maxim is particularly true. For those trying to achieve long term goals, such as retirement or estate planning, it’s often times risky to try and avoid all risk.
Being overly risk-averse toward stocks can result in low returns that hardly keep up with inflation, which may in turn increase the risk of running out of money before you die or failing to fully fund an estate. For some investors cash and bonds alone don’t offer the inflation-beating returns needed to replace an income or provide a legacy to the next generation.
Fortunately a smart financial plan, built in a way that takes into account global risks but still seeks long term growth, can help avoid these overly-cautious decision biases.
Is Your Plan Risk – and Reward – Aware?
With all the uncertainty in the news now is a great time to evaluate your financial plan to see if it’s managing risks in a smart way.
Does your plan:
- Ignore the relationship between reward (investments) and risk management (insurance), or does it address both investments and insurance in a comprehensive way?
- Diversify investments and insurance to provide multiple sources of return and income?
- React to the latest headlines or take emotion out of the decision-making process?
- Rely too much on one company or country? (Note: If your pension, 401k, and life insurance are all provided by your employer or heavily invested in one country this can be a big risk.)
The best way to be sure your plan is well prepared for the risks and rewards of the global economy is to consider a range of scenarios and potential outcomes of your plan. Your success is based on achieving your goals and desired lifestyle not the value of the stock market on any given day.
There is no guarantee that the implementation of a financial plan will yield positive results.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.