How can you make your finances more resilient?

Investing can sometimes seem like an exercise in crisis management. This has been especially so in recent years with threats to portfolios including the war in Ukraine, the COVID-19 pandemic, and the US-China trade dispute. 

Along with these external perils, investors also face risks of their own making — such as panic-selling during a market downturn, overspending, or holding too much cash in times of high inflation.

This combination of threats highlights the need for strategies that bolster financial resilience. This, in our view, goes beyond efforts to reduce short-term volatility through hedging or holding safe-haven assets, important as this can be.

Instead, financial resilience should be a broad plan that improves the chance that an investor will achieve their financial targets, which can, for example, even involve taking on more risk.

In this CIO Tutorial, we explore ways to shield wealth from the negative impact of shocks, the right amount of cash to hold, the role of diversification in protecting investors’ finances, and the use of insurance to manage risks.

What is financial resilience?

Financial resilience is a measure of how robust a financial plan and money are to shocks. 

Everyone has financial goals. Some near-term goals may not require much forethought or a great deal of money. For many investors, covering the cost of replacing a hot water boiler would be straightforward. 

But financial resilience is elusive for others. A January 2022 survey by Bankrate found that 56% of Americans surveyed wouldn’t be able to meet an unanticipated $1,000 expense out of savings.

Entrepreneurs and investors frequently set themselves longer-term financial goals, for example: building a retirement pot, saving for children’s college fees or raising money for a business acquisition.

Meeting these long-term objectives will likely require a financial plan and the money to put that plan into action. Sources of funds can include spending from income or selling down assets accumulated over years.

What does it mean for a business owner or investor to be financially resilient?

There is no single answer. For some, financial resilience is the ability to change their goals — for example, to abandon a business acquisition or delay retirement — if financial markets do not perform as expected or the raise at work never materializes.

Others may regard themselves as financially resilient if their portfolio delivers the returns needed to reach a financial target at the time it’s needed.

The ideas of financial resilience and perceived safety are connected. But defining safety as holding just low-risk instruments like cash could be a mistake, especially for achieving far-off objectives. 

To learn more, read the full article from UBS.  

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