Finance Q&A

Financial Q&A

Q IFinancial Q&A

Protecting your investment portfolio

Q. What personal financial lessons can be learned from the 2020 COVID pandemic?

A. The 2020 quarantine resulted in severe economic disruptions for consumers and service-oriented businesses. One of the biggest personal finance lessons we can learn from the pandemic is the importance of a substantial emergency fund. While many financial experts recommend an emergency cash reserve in the amount of three to six months of living expenses, the depth and length of the COVID uncertainty illustrated the importance of larger cash reserves that can provide up to one-year or more of living expenses.

A fundamental investment strategy that can help your portfolio weather uncertain times consists of the following formula: stay invested and stay diversified. Financial market unpredictability was on full display in 2020. As the market declined, some investors panicked and sold financial assets for the safety of cash. Those investors that stayed out of the market eventually missed the recovery and a double-digit return in equities (S&P 500 Index) by year end. Remember, it is time not timing that benefits investors most. Consistent long-term success also starts with the creation of a diversified portfolio. This investment approach utilizes a basket of securities across multiple asset classes. Offensive assets (stocks) provide portfolio growth, and defensive assets (cash and bonds) provide portfolio stability. In the right combination, these assets work together to minimize the effects of market volatility and uncertainty. The appropriate mixture of cash, bonds, and stocks will depend on your financial circumstances, tolerance for risk, and need for return. Following a disciplined investment process is a great approach to keep your investment goals on track.

Planning for uncertainty is difficult, but insurance (risk management) can be an effective tool to help offset adverse moments in life. Health, disability, life, long-term care, liability, and property insurance policies should be major components of your risk management strategy. Adequate amounts of coverage and costs for coverage are factors to consider, but the benefits of a strong insurance plan can be significant for your personal finances when you need it most.

Having the proper estate documents in place is another crucial message that can be taken from the COVID catastrophe. The most prudent course of action is to be prepared, so use these basic documents to help build a solid foundation for your financial wishes upon death or incapacitation: last will and testament, living will, financial power of attorney, and advanced medical directive.

Over the course of a lifetime, turbulent times will resurface, and your financial goals and objectives will change and evolve. Contact your advisor(s) for a financial check-up. They can help evaluate your financial health, highlight adjustments needed, and develop and implement a plan for success.

William B. Howard, Jr., ChFC, CFP

International Place II 6410 Poplar Ave., Suite 330 Memphis, TN 38119 Telephone: (901) 761-5068 Fax: (901) 761-2217 whoward@whcfa.com