The Intersection of Current Events, Banking Crises, and Financial Planning: Navigating Uncertainty with Prudence

It’s been said that the only constant is change and lately it’s been the banking crisis. Financial planning is often more about what we don’t know than what we do know. Lately, we’ve been through COVID, supply chain issues and (ongoing) issues with some of our country’s financial institutions.

So, what is the critical relationship between banking crises, current events, and financial planning.  And what are the key considerations for individuals and businesses to navigate uncertainty and safeguard their financial well-being.

Banking Crises: Causes and Consequences

Obviously, the banking crises, characterized by financial distress and instability in the banking sector, can have far-reaching implications for individuals, businesses, and the overall economy.  This particular problem seems to have been triggered by factors such as excessive risk-taking combined with weak regulatory oversight and further magnified by economic issues, including those within the financial system itself. The consequences of banking crises usually include credit crunches, liquidity constraints, loss of investor confidence, and economic recessions – and this time around was no different.

Impact on Investment Portfolios and Asset Allocation

During a banking crisis, financial markets often experience significant volatility and disruptions. Asset prices often plummet as investors flee to safety, liquidity may dry up, and credit availability may shrink. And it happened again this time around, too.

The typical line goes like this: when there’s a banking crisis, individuals and businesses need to reassess their investment portfolios and asset allocation strategies. Diversification becomes crucial to mitigate risk, as investments that seemed stable during normal market conditions may become highly vulnerable during a crisis. Financial planners, too, need to carefully analyze the impact of a banking crisis on different asset classes, such as equities, bonds, real estate, and commodities, to guide clients in making informed decisions and adjusting their investment strategies.

A lot of intelligent sounding guidance? Translation: react to the news and make changes in your long-term portfolio so you can be in the wrong allocation the next time you  have to react to new news.  Hey, that’s what keeps Wall Street ticking.

Reevaluating Risk Tolerance and Emergency Funds

One thing worth doing: reevaluate your risk tolerance. It’s easy to say you can accept risk when markets are going up. But, if you feel you have to adjust your portfolio (see ‘intelligent guidance’ above) because of short-term events, it’s proof your initial plan was flawed – and that’s often the result of a flawed initial risk assessment. It’s true crisis may necessitate a more conservative approach to investments, with a focus on preserving capital rather than pursuing higher returns. Additionally, building and maintaining an adequate emergency fund becomes even more critical during periods of banking crises.  But, again, all of that should have been part of the initial plan.  

I remember 2008-9 credit meltdown very well. What I remember most – and was most happy about – is that my phone never rang once.  No one had to make adjustments in their portfolio because their initial plans had anticipated Murphy’s Law and ‘stress tests’ were run in advance to make sure their investments were in line with a well-designed risk assessment.

Financial Advice is About More than Investments

During my initial introductory call with clients, I make it clear what’s controllable and what isn’t.  It’s been my experience – a little over thirty years now – that failure for many people is usually less about the investments they’ve chosen (though, sometimes that has been somewhat eye-opening – performance-chasing is a losers game) but more about their expectations and behavior if and when those expectations turned out to be unrealistic.  That’s why the understanding of what’s controllable and what isn’t is so important.

Social Security is an Asset Class

Few people recognize the true value of their Social Security checks. Where else can you get an income for life with cost-of-living increases? There are some annuity products that provide COLAs, but I haven’t found any outside the variable type and those come with a lot of moving parts and some other issues that are outside the scope of this post. Back to our Social Security check….

If you expect your Social Security benefit to be $3,000 monthly, for example, that $36,000 annual benefit is more valuable than you might think.  How much additional money would you have to have invested in your retirement portfolio to provide that $36,000 annual benefit with cost of living increases – for life?

Most planners would probably tell you – and they might be right – that it would take somewhere between $900,000 and $1,200,000 in additional investment money to provide the same benefit (between 3%-4% of assets as a withdrawal rate). There are, of course, a number of factors that can affect that number, but you get the idea. That’s why making the decision about when you claim can be very important.  You can learn more about that here.

If I can be of help to you, let me know!



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Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor. He is also licensed for insurance as an independent agent under California license 0C00742.

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