Is your financial ‘home’ prepared?

This post was originally published on link to post

Market fluctuation can be viewed as the price investors have to pay for being involved with the wealth-building power of the financial markets.

But rationalizing market fluctuations doesn’t make them any less nerve wracking, especially if you’re nearing retirement age.

It is important to build your financial home during good weather when you can evaluate priorities in an objective manner. Acknowledging the weather will not always be sunny and preparing in a proactive manner will alleviate anxiety when a storm does occur.

Some investors react to volatility as if they were living in the path of a hurricane. They board up the windows, gather the essentials, stay put and hope the storm passes without hitting too hard.

Their approach is to hope things go well and sometimes prefer not to acknowledge what is happening.

Others may get nervous and want to leave their home and run from stormy weather. These are the investors that sometimes sell their investments at a less than ideal time.

The truth is, if you have prepared appropriately for market volatility, then normal market fluctuations shouldn’t be a concern, and you should be able to continue to pursue the important things in your life and spend as you normally would during times of mild weather.

There are several important issues to keep in mind when building your financial home:

Create a wealth plan that covers all your bases

No wealth plan is totally immune to market fluctuations. But by diversifying your investments across stocks, bonds, and other financial vehicles, it alleviates the exposure that a single market event is going to jeopardize your long-term security.

It also is helpful to have both long- and short-term savings “buckets” that can be used depending on your age, goals and how close your are to retirement.

This combination of diversified assets and adequate liquidity provides stability. It also provides flexibility that can used to address potential problems or to take advantage of opportunities that might benefit your overall portfolio.

Understanding your overall plan and how your spending goals are met through your various cash flows may allow you to get through any storm that may occur in the future.

Looking at your plan as a “home” that has money flowing in and out based off of your needs and overall allocations will create a more objective view of your long-term financial path.

Using a process that includes interactive tools that allows the simulation of future “storms” and how they affect your financial home will lessen the anxiety level and decrease the “surprise” factor when they do occur.

Identifying what you feel is a comfortable level of fluctuation before it happens is a priority when building your wealth plan.

Return is important, but not at the expense of comfort. Identifying these issues upfront lessens the likelihood of emotional reaction later.

Unfortunately, fear and greed are the primary emotions that drive financial decisions at the extremes. Building a plan proactively when these emotions are not present will help create an objective discipline for your plan.

Market volatility can trigger some emotional decisions at both ends of the scale.

During extreme down markets, worrisome investors may feel the need to over-allocate to cash, bonds, CDs and other low-yield options that cripple their long-term wealth-building.

Overly optimistic investors may see “buy” signs everywhere they look and get in over their heads. Creating a plan ahead of time allows clients to weather the storm knowing they have prepared for it.

The goal is not to make changes during the storm but to build a home that will withstand the volatility along the way that is within an acceptable comfort zone.

Having someone in your life who understands your attitudes toward money can be one of the biggest benefits when developing an objective plan.

It is important this person knows you, your history and your goals before you let bad news or scary headlines distract you from a well-thought-out plan.

Focus on the long-term, not short-term

There always seems to be some issue or event the market appears to focus on and create fluctuation in your portfolio.

Managing your plan with a long-term perspective will help lessen the importance of these movements and allow you to focus on what is important in your daily life.

Your financial home will evolve over time and is a long-term ongoing project. Evaluating your goals on a regular basis and making adjustments will allow you to handle any troubling weather that comes your way.

And knowing your plan is customized to your needs may allow you to sleep soundly each night.

This article is provided by Pete Alepra, a financial adviser at RBC Wealth Management in Cedar Rapids; peter.alepra@rbc.com. The opinions in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. RBC Wealth Management is a division of RBC Capital Markets, a member of the NYSE, FINRA and SIPC.