Sometimes, very rarely, everything goes exactly according to plan.
Far more often, there are shocks to the system. Whether you find yourself away on holiday with the family and suddenly unable to fly home, your employer is suddenly forced to downsize, your head of state is placed under investigation or the courts tell your government they must change their ways, external influences can have a huge effect on your short-term finances and have the potential to derail your longer term plans.
A few weeks ago, we wrote about ‘Black Swan’ events and how they influence the financial industry. I’m not talking about those here. A Black Swan event is so unlikely or unprecedented as to be fundamentally unpredictable. Events like those I described above, as have taken place in the last few weeks, are uncommon and destabilising, but wholly expectable. We refer to these upsets as ‘known unknowns.’
For expats, the risk associated with political, social and economic surprises is often increased, particularly if their residency outside their home country is not permanently assured. As the Brexit drama has unfolded, we have seen this in action. Many British expats in the EU (and of course Europeans in Britain), previously comfortable that their residency was guaranteed, have found themselves in limbo, unsure of their future and forced to make contingency plans. While the Brexit vote was certainly a Black Swan, the turmoil and indecision since then was predictable enough, and we have been guiding our clients to adjust investments and prepare accordingly.
The reassuring thing about known unknowns is that they are recurrent enough to be planned for. The irritating thing is that we can never predict which one will strike and when. For this reason, we have only two ways to deal with them, reactive and proactive. Each has its merits and the two should not be exclusive.
Proactive preparation for financial surprises begins with protection. Insurance, diversification and regular reviews are your friends. We hear lots of talk about having many baskets for your eggs, but if your baskets are all from the same supplier or all carried on the same trolley, the risk is just as great. In finance speak we seek uncorrelated or negatively correlated investments, so that they don’t all move in the same direction at the same time. Insurance is the only part of financial planning where the best possible outcome is that you lose all the money you have contributed. It is designed to make a bad situation ‘less-bad,’ rather than give direct benefit. Diversification in terms of currency, asset class and region is essential for anyone with an international profile and portfolio, but think first about where and when you will be spending what you have saved, rather than being rooted in the here and now.
Regular reviews are of prime importance. They not only allow you to adjust for changes in your own life, they allow you to be proactive based on new information. Every time something comes along to move the goalposts, you could retake aim. Don’t just assume that things will go ‘back-to-normal.’ This is reactive investing but still with an eye on the future.
New opportunities may present themselves out of the ashes of recent problems. What may seem like a terrible blow to your long-term plans today, could well be the reset or discount that you needed in order to achieve your goals.
When it comes to known unknowns, it is always best to categorise them and their potential impact so that an appropriate safety net can be put in place. If losing your job would be immediately disastrous to your family, you can arrange for income protection. If changes in exchange rates would stop you from putting food on the table and paying your bills, rebalance your holdings of different currencies.
If your goals don’t take into account what could go wrong, you should speak with your advisor about the what-ifs, the emergencies and the disasters. Plan for the worst and you will always be pleasantly surprised when things aren’t quite that bad.
Most importantly, expect the surprises. Embrace them. Make them a part of your plans for the future. Most things in the investment world are cyclical. Everything else is only a surprise the first time. If a Black Swan serves to change traditional views, the known unknowns are how we should apply those changes.