Episode Details

If there is one certainty in life, it’s that there’s always going to be some uncertainty.

Of course, there are times in our lives where there’s higher levels of uncertainty, which can be very stressful. But, to a degree, we all have to become comfortable with some level of ‘uncertainty’ and learn how to dance with it.

This is especially true with financial decisions. Markets never exhibit zero risk (i.e. no uncertainty). This blog considers how to financially navigate uncertain times, much like we are experiencing today.

Uncertainty can exist in three ways being (1) personal circumstances, (2) domestic uncertainty and (3) global uncertainty. Each is different and requires a different approach.

Personal uncertainty

Personal uncertainly relates to your personal financial position. This can include things such as the risk of a change in your income, losing your job, unexpected bills, relationships and so on.

How to deal with personal uncertainty

When it comes to personal uncertainty, the best thing is to put all material financial decision making on hold. Typically, the uncertainty resolves itself within a few months or possibly a year. That is, your fears are either realised, or the risk evaporates. Either way, it is likely that sometime in the near future you will be able to resume normal decision making (management).

Remember, investing and building wealth is a marathon, not a sprint. There’s no need to put yourself under any undue time pressure. Instead, you must make deliberate and well thought out decisions – there’s no need to rush. However, of course, at the same time, you must consciously avoid unnecessarily procrastinating too.

It is possible (although rare), that the passage of time does not in fact eliminate the uncertainty. An example of this is when one of my clients was facing the prospect of his employer cancelling his project (i.e. redundancy) for many years. In this situation, we just had to accept this higher risk and proceed with implementing his financial plan. We held larger than usual cash buffers to mitigate some of these risks. In the end, the redundancy did eventuate, but not for many years.

Domestic uncertainty

Domestic uncertainty relates to matters that are unique to Australia. These can include things such as changes to taxation rules or economic health. A recent example of domestic uncertainty arose during last year’s Federal election campaign where the Labor government proposed making changes to negative gearing and capital gain tax. Remember that? That was less than a year ago!

How to deal with domestic uncertainty

Tax and superannuation rules are everchanging. Economies move in cycles (although it has been almost 29 years since Australia’s last recession – although we have almost certainly broken that streak already). Most of these risks (or uncertainties) are cyclical and will continue to be present for the foreseeable future.

The best way to deal with domestic uncertainties is through your investment strategy formulation. For example, you must have sufficient diversification in regard to items such as investable asset classes and ownership structures so that you are not ‘single point sensitive’ to a change in tax law. You must ensure your property investments are of a sufficiently high quality, so they are able to absorb the impact of a tax hike and still remain viable.

Put differently, your investment strategy shouldn’t fail just because of a change in law or the end of an economic cycle. For long term investors, these events should not be unexcepted.

Another approach is to price the risk into the transaction you are contemplating