By Dave Anthony
Learn more about Dave on NerdWallet’s Ask an Advisor
Chances are good that if you turn on the evening news or pull up your favorite newspaper on your iPad, one of the top stories will relate to emerging risks around the world. Whether it’s strife in the Middle East, tensions with Russia, or the ever-shifting balance of power among global leaders, 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.
When large investment houses start talking about geopolitical risk, it’s probably a good idea to take note. Money managers usually spend little time discussing the possibility that policies among countries could lead to destabilizing situations, but at the end of 2014, the chairman 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.”
Whether such a dire warning sounds overly pessimistic isn’t necessarily the point. What’s important is that it reveals that large money managers are starting to pay a great deal of attention to global risk.
But how do you address these risks? 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 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?
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 risky to try to avoid all risk.
Being overly risk-averse toward stocks can result in low returns that hardly keep up with inflation, which in turn increases the risk of running out of money before you die or failing to fully fund an estate. For most 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 that takes into account global risks but still seeks long-term growth, can help avoid these overly cautious decision biases.
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, 401(k), and life insurance are all provided by your employer or heavily invested in one country, this situation 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 talk with a professional planner today.
After all, wouldn’t it be nice to watch or read the news and not worry about the negative headlines because you know you’ve got the right plan – and the right planner – on your side?