4 Steps to Prepare Your Financial Plan for Economic Uncertainty
2020 was a year unlike any other, dashing expectations we had for our personal lives, politics and the economy.
Look back one year ago at the economic outlooks and forecasts, and you’ll see predictions that were comically out of date before the end of the first quarter. Yet we forge ahead now with a look at what to expect for 2021 and, more importantly, how people can prepare for the unpredictable nature of the world today.
Economic Outlook
It will likely take years for the U.S. economy to recover from the COVID-19 pandemic. Additional government stimulus and promised infrastructure spending from the Biden administration should help in the short term, but we expect GDP growth to be slow at best for the next several quarters. And a recession is not out of the question sometime in the next two to three years.
Still, we could be through the worst of it for now. Year-over-year numbers will continue to show the economy contracting, but quarterly earnings should improve for many companies. Because of that, we expect stock market valuations to continue to be out of step with actual economic growth, which could make stock prices vulnerable.
The simple truth, though, is that we need to approach 2021 using the lessons we learned in 2020: Don’t get ahead of ourselves, because things can change very quickly. Successful distribution of an effective COVID vaccine could turn this situation on a dime. Effective government stimulus and quick action on infrastructure spending could accelerate it. But neither are a guarantee, and if they fail to materialize, so will their economic benefits. At the same time, rising inflation, a falling dollar and increasing federal debt could turn our situation south again.
If the economy seems so uncertain and changes so quickly, how can your financial plan keep up? It comes down to mindset and preparation.
Keep track of the short term and don’t try to guess where things are going.
If we learned anything in 2020, it’s that none of us has any idea what will happen next. We should resist the temptation to look too far ahead. Definitely don’t make changes to your plan based on assumptions about the future. You and your financial planner should make decisions based on what you know for a fact, keeping a short-term view that’s essentially quarter-to-quarter. Making predictions on a longer timeline that relies on forecasts could become quickly outdated. What some people call forecasts are really just educated guesses. When your financial future is at stake, it’s just not worth it to make guesses.
Always keep your focus on long-term goals.
While you shouldn’t make decisions based on long-term predictions, you should make decisions based on your long-term goals. Remember your horizon for financial planning. Most people are looking at a timeline measured in decades rather than quarters. Even if things take a turn for the worse, you won’t spend your entire investment portfolio in a year. You and your financial planner can revisit your objectives and make adjustments as needed to account for temporary losses and still help you reach your long-term goals. And always remember when thinking about the long term that the best time to buy stocks is when they are on sale.
Stress test your cash flow plan.
You should have a solid plan in place for how your incoming cash is distributed between investments, savings and spending. What happens when your carefully calculated plan is thrown out of balance? I regularly stress test my clients’ cash flow plans to find all the vulnerabilities and develop solutions to address them. We might take out 25 percent of income to account for a job loss or plug in significantly lower earnings expectations on assets. We might even increase expected cash expenses by 15 percent to account for unexpected costs. If we can account for wild swings in a modeling environment, we can make a financial plan stronger and better able to withstand an unpredictable world.
Keep enough liquidity to cover everything you need and everything you don’t know you need.
During good times of strong growth, it’s smart to build liquidity and keep it socked away for a down period. In addition to keeping up normal expenses, people lose their jobs. They get into unexpected elder or childcare situations. They have home or car emergencies. Even if you haven’t kept adequate liquid assets, you can still find and build them in a tough economy. Revisit your assets with your financial planner to look for opportunities to boost your cash flow. Make use of what you have and reallocate your income, if necessary.
When the world changes quickly, anxiety about our finances can rise. That’s why it’s important for people at all levels of the financial spectrum to have a plan and stick to it. The wealthy and middle class alike can benefit from working with a financial planner and making preparations in all times: good, bad and uncertain.
Eric Revell is a trust portfolio advisor for Pinnacle Financial Partners and a Chartered Financial Analyst®. He is based at the firm’s Irving Park office in Greensboro, NC, and can be reached by phone at 336-881-3424 and by email at Eric.Revell@pnfp.com.
