Markets have been extremely volatile and have fallen precipitously. The economy is at risk and so are our businesses, our careers, and our livelihoods. We are worried about our financial picture. Some of us have had the opportunity to plan for the worst and even though we are prepared, this is still challenging. If you haven’t had the opportunity to plan and prepare, then now is the time to do so.
As a financial advisor and someone who manages the investments of individuals—founders, entrepreneurs, and c-suite executives—I’m used to navigating these clients through many challenging market cycles. I’ve had a lot of conversations about what to expect, and I want to help you plan for the unknown too! But before we discuss some ways to better your financial well-being and overall personal livelihood, let’s first acquaint ourselves with a friend of mine, cash.
Step 1: Supercharge your awareness–cash is queen
Specifically during stressful economic and market conditions, cash is a safe haven, which means no matter the level of your wealth, you are probably going to feel more comfortable holding cash rather than those potentially more risky investments in your portfolio. Cash can’t lose value, except for changes in exchange rates and inflation (and does include opportunity cost). But cash will not fluctuate like stocks and bond values do when there is a mismatch between buyers and sellers in the market. Cash will ultimately retain its value.
Cash from an investing standpoint provides little return, but it does provide some durability and protection when economies and investors grow uncertain, and investors are definitely uncertain right now. Even though cash has little return, from a risk perspective, it‘s value will NOT drop like some of your stocks and bonds. Why is this so important? Emotionally, we worry when social media tells us stocks and bonds are “plummeting” or “setting record lows.” We worry if we can afford our bills, our
rent, or enjoy a weekend brunch. But if we have a cash strategy in place for our short term spending needs, we can ignore the short-term uncertainty and focus on our long-term strategy.
Step 2: Bring some renewed passion to planning
As an investor and a financial advisor responsible for many other ambitious women like yourself, I believe strongly in planning as a decision tool. As before, your power lies in understanding your options and ability to make educated decisions, but I have found that people don’t commit to ideas or strategies they don’t understand. So let’s talk about what a plan is. A financial plan is a document that outlines your net worth or economic balance sheet, which breaks down your assets and liabilities, and can even
incorporate your future spending goals and human capital (future earnings power).
First and foremost, this statement will tell you exactly where your assets are invested, what types of accounts they are held in, and how much you 1. Own and 2. Owe. Knowledge is power. But a plan will also tell you your output gap, which is the difference between how much you spend and how much you make. A plan will organize your budget and keep you on track to pursue your goals. Unlike that new year‘s resolution that gives heed to those fledgling winter blues and soon to be springtime distractions,
a plan is a necessary tool that helps you answer questions like, “if I purchase that laptop, or that new subscription, will it bring me closer to my goals or set me further away.” The true purpose of a plan, like everything else discussed, is the awareness of our circumstances and the impact of our decisions. With a plan, you can say goodbye to guilty purchases and say hello to a happily aware and educated decision maker!
Step 3: The nitty-gritty of getting strategic in the short and long-term
If you have not planned properly, definitely do not panic–even if you have planned, let’s put that plan to work and make some necessary adjustments. After all, a plan is not a final document but rather a “living and breathing” guidepost, which needs constant refreshing and attention. Let’s talk about some strategies within a financial plan.
Your liquidity strategy is a means to assessing funds for your short term spending. By nature, liquidity strategies should be nearly riskless and stable. Just like cash is queen, there are ways to build a strategy around what we call cash equivalents. Let’s keep the jargon to a minimum, but explore some cash-like alternative strategies:
1. Emergency Fund: You can invest in cash, money market funds (MMF), Certificates of Deposits (CDs), Treasury Bills (T-Bills), or any type of investment that you have easy access to. There are more sophisticated strategies like bond ladders, which invest in different maturities (such as 12 months, 9 months, 6 months, and 3 months), that expire every 3 months and pay you a coupon from all the non-maturing bonds and principal of the maturing bond. I recommend consulting a financial advisor if this is suitable for your financial situation, this is the same with loans and other borrowing.
2. Cash Flow Strategy: Remember that financial plan, and if you have an output gap where you are spending more than you are making and saving, then find ways to cut back on unnecessary expenses. Besides your discretionary spend, consider some credit card and student loan debt strategies like paying the bare minimum. This usually goes against our advice, but in tough economic conditions, like I mentioned, cash is Queen. You need to figure out how you are going to get yourself through these uncertain times first and foremost.
3. Government Resources: Check your small business association lending programs for ways to access liquidity. Governments are making unprecedented moves to help small businesses amid the Covid-19 crisis. The US Chamber for Resources is also providing loans and funding to small business owners and individuals who are seeking liquidity.
Having a cash strategy in place can allow you to refrain from selling your other higher returning assets in your portfolio, especially at depressed values when market values might be down and your need for cash or liquidity is greatest. In this sense, cash protects you from decision risk, which is when you make irrational decisions to sell your investments at inopportune times. Because economic cycles change from bad phases to good phases, actively decide to keep your longer-term investment strategy in place. Or as I like to say right now, “don’t touch your face and don’t touch your 401(k).”
Investments that will meet your future needs in five or more years are usually found in an investor’s long-term strategy. Your 401(k) or rollover IRA are tax-deferred accounts that allow for preferential tax treatment and compounded returns, without tax drag. This is not the account for you to be holding cash or cash equivalents. These are your growth investments, and you have an ability to take on a bit more risk as you will have a longer time horizon to recover any losses. You also want to keep up with inflation to achieve your goals, like saving for that down payment on a house, or a child’s education. Think about owning quality stock and bonds, possibly companies that have a good track record of paying dividends and growing their dividends, and bonds that have quality investment returns. This is not money you are expecting to touch, so don’t let any market stresses get you down.
With these 3 steps, you have enough information to get you started. Of course, as a Private Wealth Advisor, I am going to recommend reaching out to an advisor for guidance. As investors, we are behaviorally irrational when thinking about our own money, both from a cognitive and emotional basis. It is hard enough that our world is changing at a rapid pace, but thinking about your finances and decision making under duress can be even more difficult. There are many resources and people who
want to help you, our team included. This will pass, but the opportunity to make good decisions today will soon pass, too. Take the time to review these steps and seek the proper help. We are rooting for you!
- Kathy Entwistle is a Senior Vice President – Wealth Management, Senior Portfolio Manager and Private Wealth Advisor at UBS. She is on a mission to help women understand, embrace and make great decisions about their financial future. Follow Kathy on Instagram @kathyentwistleubs. Kathleen Entwistle is a Financial Advisor with UBS Financial Services Inc., 61 S Paramus Rd., Paramus, NJ. Any information presented is general in nature and not intended to provide individually tailored investment advice. Investing involves risks and there is always the potential of losing money when you invest.
- The views expressed herein are those of the author and may not necessarily reflect the views of UBS Financial Services Inc. UBS Financial Service Inc. offers both investment advisory and brokerage services, which are separate and distinct and differ in material ways. For more information regarding the distinctions and the different laws and contracts that govern, please visit / UBS Financial Services Inc. is a subsidiary of UBS AG. Member FINRA/SIPC.