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How to Protect Your Wealth in a Volatile Market

18 Oct

By: Colleen Weber

Economic Outlook / Investment / News and Updates

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By Colleen Weber, CFP®, CPA

Benjamin Graham once said, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” This quote may seem confusing on the surface, but the point is quite simple: in the short run, the market acts like a popularity contest with investors chasing the hottest trend of the moment. The votes are tallied, and the most “popular” stock gets the highest price, regardless of its true value. In the long run, however, the popularity contest fades and the market starts to reflect the true value of the stocks.

This is all to say two things: first, the market will always have ups and downs; second, short-term fluctuations, while certainly scary at times, should not be your primary impetus for investment decisions. 

It can be hard to quell your emotions when you see dramatic changes in your portfolio, but that is why there are other strategies to help make sure you’re covered at all times. With these four steps, you can feel a little more comfortable no matter how the market is trending.

1. Diversify and Maintain Your Income

This may seem overly obvious, but it can’t be overstated: your income is your greatest wealth-building tool. A consistent income stream allows you to build an emergency fund and prevent the need to sell assets or take on debt to meet your basic expenses. A solid income stream is great, but multiple streams of income is even better. 

Diversified income streams act in much the same way that diversified investments do. They allow for less demand and stress on any one income source, so that if an unforeseen event like job loss or reduced pay were to occur, the remaining income streams can pick up the slack. There are many ways to diversify your income, including purchasing rental property or investing in real estate.

2. Control Your Expenses

Another way to protect your wealth is to control your expenses. Budgeting and tracking spending habits are a common way to do this, but also consider consolidating or refinancing debt. 

For those who are no longer dependent upon earned income and are taking distributions from an investment portfolio instead, consider reducing your expenses and your withdrawals during market downturns. This will help maintain your income without selling any of your portfolio assets.

If you are still in the accumulation phase and dependent on earned income, focus on building an emergency fund to cover 3-6 months of basic living expenses. Beyond that, controlling your expenses is crucial to building and maintaining wealth. Some expenses will be non-negotiable (like utility bills), while others may have some room for cuts (eating out). Over time, your budget can be modified as needed so that you are better prepared to withstand potential fluctuations in income.

3. Review Your Risk Management Strategy

Next, it’s important to understand the major categories of loss that could jeopardize your assets and prepare a mitigation strategy to protect against each. Unmanaged risk can mean the difference between maintaining an ample emergency fund or not having enough when you need it the most.

An umbrella liability policy is a must, and coverage limits should be high enough to cover your net worth. If you own a business, make sure you have adequate coverage for professional liability, errors and omissions (E&O), malpractice, and other types of coverage specific to your line of work.

Be sure you reevaluate your life, health, and long-term care insurance policies as well. A new report from RBC Wealth Management found that the lifetime cost of healthcare for a healthy 65-year-old is over $400,000! That doesn’t even include the cost of long-term care, which can run up to $100,000 per year. (1) These expenses are often overlooked and can have devastating effects on your accumulated wealth. 

Making sure you are adequately covered now will save you time, money, and energy in the future.

4. Stay Current on Public Policies 

Remember to pay attention to local and federal policies that could impact your personal or business finances. For instance, the proposed tax portion of the Build Back Better Agenda contains many provisions that could affect you if you have significant estate assets, plan to retire, or expect to have large capital gains in the next couple of years. It is crucial that you stay up to date on changes like these so that you can amend your financial strategies as needed to protect what you’ve already built. 

Talk to a Financial Advisor

Protecting your wealth doesn’t have to be difficult or overwhelming, especially if you work with experienced financial professionals. If you’re concerned about the current market volatility and want a second opinion, reach out to me at (952) 470-0750 or book a free introductory meeting online! Together, we can create a wealth management strategy that you can rely on, even in volatile markets. 

About Colleen

Colleen Weber is a fee-only financial advisor, CERTIFIED FINANCIAL PLANNER™ professional, and CPA with more than 15 years of financial planning experience. Providing comprehensive financial planning and wealth management, she specializes in serving clients nearing retirement, retirees, busy professionals, and women. She is passionate about developing financial plans that save clients on taxes and investment strategies that help them pursue their goals. Learn more about Colleen by connecting with her on LinkedIn or booking a complimentary phone call meeting.

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(1) https://www.rbcwealthmanagement.com/_us/static/documents/insights/taking-control-of-health-care-in-retirement.pdf