Financial planning is a personal affair, and it’s important that you stay focused on your own unique goals. However, it’s impossible to deny the effects that global events can have on your wealth, especially during significant periods of disruption.
The Covid-19 pandemic was a prime example of this. As the world went into lockdown and businesses felt the effects, you may have seen a notable fall in the value of your investment portfolio. In fact, according to the Institute for Fiscal Studies (IFS), the FTSE All-Share Index – an index of the best performing companies on the London Stock Exchange (LSE) – fell by 35% between 2 January and 23 March 2020.
Many families sadly lost loved ones unexpectedly during the pandemic too, and this can have serious financial implications. For instance, if you and your partner had both been working, how would you have managed your finances if they passed away, and you no longer have their income?
In the wake of the pandemic, we’re still feeling the effects of sustained high inflation and rising living costs, which may put pressure on your budget.
The Covid-19 pandemic is just one example of a global event that can cause serious financial shocks. Yet, all manner of events such as wars, elections, new technology, or even extreme weather events can affect your financial plan and potentially make it more difficult to work towards your goals.
These three tips could help you “shock-proof” your finances, so you’re prepared for potential challenges in the future.
1. Make sure you have adequate protection for your family
Protection is the bedrock of your financial plan as it helps to ensure you can continue working towards your goals and sustain your standard of living, even in the most difficult circumstances.
If we consider the example of the pandemic, how would you have fared if you were seriously ill with Covid-19 and couldn’t work for an extended period?
If you had had income protection in place, you may have received a regular payment until you were able to return to work. This means you would have been able to keep up with your financial responsibilities. Additionally, you could have continued making contributions to your pensions and savings for the future, so you didn’t fall behind with retirement planning.
Protection could be equally important if you pass away as the lump sum from a life insurance policy might help your family pay off the mortgage, save for retirement, or cover their general living costs.
All this means, if you have the right protection for you and your family, you are more prepared for financial shocks caused by illness or death.
2. Build a healthy emergency fund
The rising cost of living is perhaps one of the most significant financial shocks you’ve faced in recent years. You might have seen many bills increase, especially your energy costs, and this could make it more difficult to manage your budget.
When your finances are stretched, unexpected costs such as home repairs or replacing your car could be even more difficult to deal with. Unfortunately, if you don’t have funds available to cover these increased outgoings, you may have to rely on expensive borrowing.
That’s why it’s vital that you build a healthy emergency fund. Having some cash savings to fall back on means you can cover large one-off costs without increasing your debt. During a period of rising inflation, you might also use your emergency fund to help you bridge the gap between your income and increased living costs.
This could mean that you’re better able to absorb a rise in your cost of living without sacrificing other financial goals, such as contributing to savings and investments for the future.
It is recommended that you keep three months’ worth of expenses as an emergency fund. However, it’s up to you to decide whether you would feel more comfortable with a larger buffer that could sustain you for a longer period.
3. Create a well-diversified investment portfolio to balance risk and beat inflation
Market volatility could affect the value of your portfolio and potentially make it more difficult to achieve certain financial goals.
Fortunately, markets typically bounce back and continue growing in the long term. Yet, if you don’t properly balance risk when investing, global events that disrupt your portfolio could have a more significant effect.
It’s particularly important to create a well-diversified portfolio by purchasing a variety of investment types, across different industries and geographical regions. A recent upset in the tech industry demonstrates the value of diversification.
The “Magnificent Seven” – a group of high-performing tech companies including Nvidia, Tesla, Alphabet (owner of Google), Microsoft, Amazon, and Apple – have seen rapid growth as technology becomes a more important part of our lives. In October 2024, Investopedia reported that Nvidia had generated growth of 3,130% in the past five years, while Tesla grew by 1,240%. The rest of the Magnificent Seven saw growth of more than 100% in the same period.
These significant returns encouraged many investors to purchase tech stocks, and you might believe these investments are very unlikely to fall in value. After all, companies like Amazon and Google provide services that are central to most of our lives.
Yet, the launch of “DeepSeek” – an advanced Artificial Intelligence (AI) application released by a Chinese company – shook the tech industry. According to the Guardian, a total of $1 trillion was wiped off established tech stocks overnight. Nvidia alone lost almost $600 billion, and Alphabet saw losses of around $100 billion.
While the value of these stocks may recover in the future, the event demonstrates how even the most successful and seemingly “safe” investments could be vulnerable to market movements.
If you had put all your wealth into the Magnificent Seven after seeing their performance in past years, the overall value of your portfolio could have fallen significantly after this recent upset.
Conversely, if you had investments in many different industries alongside your tech stocks – or even invested in tech companies in emerging markets – any losses may have been offset by gains from elsewhere.
This kind of volatility can occur in all industries because of changing consumer trends, new technology, government regulations, or global events that affect business operations. That’s why diversifying your investments is so important as it means your portfolio is less vulnerable to financial shocks. Ultimately, this means you may be more likely to generate the sustained growth you need to achieve your financial goals.
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If you’re worried that you may be vulnerable to financial shocks, we can support you.
Please get in touch or email us at advice@mlifa.co.uk for more information.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Note that financial protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.
Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.