This year, the NCAA basketball tournament has been nothing short of exciting. With major upsets like that of Duke by unexpected sleeper team South Carolina and the prospect of an all-Carolinas final, March Madness has proven to be full of surprises.
While this makes for exciting game-viewing, it has also created chaos in many fans’ brackets, and the Final Four has likely turned out to be much different than what many envisioned.
Like it or not, various life circumstances can lead to similarly unexpected outcomes for individuals and their finances. From health issues to career changes to a surprise windfall, people’s financial situations can change quickly for better or worse. Because we can’t fully predict the future, it is critical for individuals to plan for the unthinkable with their financial advisor as well as other professionals on their team including accountants, estate planners and lawyers.
[See: 10 Long-Term Investing Strategies That Work.]
Create and maintain a long-term investment strategy. With unpredictable events in both markets and politics occurring around the world, it is more important than ever to invest for the long term. Instead of panicking in reaction to short-term market events and making big changes in your portfolio, stay the course and you’ll stand to benefit from the potential ensuing rallies. Investing for the long term also means that rather than trying to pick stocks and time the market, you should focus on portfolio diversification, which will help limit downside risk during market shocks.
One of the biggest mistakes investors generally make and could make in 2017 would be to take too much exposure to any one potential outcome. From the Great Rotation, to the Trump Trade, to the End of the Bond Bull, remember that every view, argument and strategy is subject to the Law of Small Numbers, which is the phenomenon where impossible outcomes are increasingly likely the smaller the sample size.
Any short-term assessment of asset markets will find a majority of performance to be driven by one-off events and their unpredictable effects on prices and trends. This means that the improbable will likely happen, and investment portfolios positioned for the long run have the best chance of surviving confusing times, should they remain disciplined and diversified amid the chaos of the short run.
Update your estate plan and ensure it aligns with your overall financial plan. Again, we can’t predict the future, but we do know that life will one day come to an end. Yet, many families realize after it’s too late, whether due to the death of a loved one or a significant health obstacle, that an estate plan isn’t up to date, or worse, that it doesn’t exist. This can lead to scrambling of family members to identify what belongs to whom and where assets are located.
[See: 9 Psychological Biases That Hurt Investors.]
Of course, estate planning conversations can be difficult, which is why many people tend to delay them. But it’s never too early to begin creating important estate planning documents such as a will, trust or life insurance policy, which will ultimately help protect your family in the event of a death. Involving your financial advisor will also help ensure that your documents account for your current and future income, assets and tax implications.
Give your emergency fund some extra padding. Starting an emergency fund may seem like a no-brainer, but a recent survey from the New York Fed found that one third of Americans said they weren’t likely to be able to come up with $2,000 in the event of an emergency.
There truly isn’t a better way to ensure you are prepared for an unexpected event — whether it’s a minor car repair or a major event like a job loss or medical issue — than to have the money already set aside to pay for it. Not only will this give you peace of mind now (and a sense of relief when the event occurs), but it will also help you avoid potential interest charges, late fees or other costs that you might have encountered otherwise.
A proper emergency fund should be equal to three months of your annual salary at a minimum, but having even more set aside is a good idea.
[See: 10 Skills the Best Investors Have.]
In the end, investing for the long term and planning for unexpected scenarios will help keep the madness out of your finances. And if you do happen to win that office bracket, it would be wise to drop those winnings right into your emergency fund.
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How to Avoid Busting Your Financial Bracket originally appeared on usnews.com
