The problem with the good times is that they make it easy to forget the hard times. The past decade, and indeed the past four months, have seen the major US share market indexes hit all-time highs despite the uncertainty surrounding trade disputes, potential rate hikes and a slowing global economy.

This has resulted in many investors expecting above-average returns, in-line with higher-risk portfolios. While there’s certainly been volatility, so much optimism makes it easy to believe the good times will continue and forget that the future is uncertain.

But is basing your investment decisions on ‘hope’, in which you hope markets will continue to deliver the returns you need, the right approach when you have so much at stake? Especially in those years closer to retirement when big market corrections can do substantial damage to your future lifestyle.

A risk-based approach makes more sense

There’s no point trying to predict the future, but you can increase your understanding of the risks of your investment decisions by considering as many distinct potential scenarios as possible. By taking a risk-based, rather than a hope-based, investment approach we have a clear understanding that the future is not predetermined. We can better understand the potential futures that could arise. All options and scenarios are on the table, it’s not simply influenced by what occurred in the past.

We also uncover how, in the past, we have labelled assets into growth and defensive’ buckets but these no longer reflect their risks. Bonds, which have traditionally been known as defensive assets, will not perform that role in certain scenarios.

We aim to capture enough broad scenarios to assess a long list of impacts on GDP, inflation, monetary policy and innovation. We also analyse a more tailored set of scenarios that are more specific to the time and issues at hand. They’re updated as asset price change, and together they function as a comprehensive framework of the potential sources of future risk. This helps us work out the mix of assets our portfolios should be invested in.

So what are we wary of today?

US rate hikes

Interest rates in the US have been low for a long time and buoyant share markets are increasingly reliant on it staying that way.

The search for yield has led investors to accept greater and greater levels of risk, but if interest rates are pushed higher the returns on cash will improve and returns on risky assets will pull back.

Global economic slowdown

Corporate borrowing is on the rise and that’s highly susceptible to slowing growth.

Much of the rising debt has been directed to industries that are now exhibiting excess capacity which can lead to lower prices and lower returns on investment. If too many loans go bad it becomes a problem for the banking sector, and other holders of the debt in the shadow banking system, which has serious implications on the health of the overall economy. While policy makers wish to avoid a slowdown, doing so through more debt that is poorly deployed will inevitably end badly.

Similarly trade negotiations with the US are ongoing and any unexpected dislocations there could have far-reaching impacts for China which is highly reliant on exports.

Brexit

There’s certainly the potential for a significant negative impact on trade between the UK and Europe if the exit is disorderly. But, there’s also a chance the division won’t happen at all. Either way, the potential downside can’t be ignored.

Conclusion

No one really knows what will happen tomorrow, next week, next year or into the future. But by identifying the risks we could potentially face, we can at least prepare our investments so that our investors’ future lifestyle isn’t depending on the hope that the ‘share markets gods’ remain kind to us.

Important information

This article is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (“MLC”), a member of the group of companies comprised National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686), its related companies, associated entities and any officer, employee, agent, adviser or contractor (“NAB Group”). An investment with MLC does not represent a deposit or liability of, and is not guaranteed by, NAB or any other member of the NAB Group.

The information in this article is general information only and is not financial product advice. It is not intended to be an offer of any products or services or recommendation to invest in specific or class of products.

Opinions constitute the judgement of MLC at the time of preparation and are subject to change. MLC believes that the information contained in this article is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made at the time of compilation. However, neither MLC nor any other member of the NAB Group, nor their employees or directors give any warranty as to their accuracy or reliability (which may change without notice) or other information contained in this article.

SOURCE: https://www.mlc.com.au/personal/blog/2019/05/how_do_you_plan_for

On average, women earn 18.2% less than men for the same job. Their earning potential often takes a dive after they have children and, as a result, they retire with significantly less in superannuation than men. Strong financial literacy can be the difference between a woman reaching her financial goals or being left at the starting gate.

Yet too many women, no matter how smart and savvy, lack the confidence to truly own their finances. It can be hard to reach out and ask for advice.

With this in mind, and to commemorate International Women’s Day, MLC set out to break this taboo with a panel discussion featuring four female financial gurus – Financy Founder and CEO, Bianca Hartge-Hazelman; Corporate Super MLC and Plum General Manager, Helen Murdoch; MLC and Plum Superannuation Education Consultant, Martina Taylor; and MLC Director of SMSF and Investor Behaviour at NAB, Gemma Dale – who are also working mothers.

They shared practical tips on how they manage their money. So, what can you do today to get your finances into gear?

Have ‘the money talk’

Finance is the leading cause of relationship breakdown in Australia.

“A lot of people don’t want to talk about money – we’re happier to talk about sex, religion and even politics,” Martina says. But when it comes to your partner, there’s no substitute for a frank and open conversation about the shape of your finances. This means coming clean about income, joint accounts, goals and, of course, debt.

Bianca suggests being clear about the things you need to feel financially empowered in your relationship, such as open communication, and deal breakers like handing over full control of your assets. Being clear about these can help you both through tricky financial conversations and keep you on the same page.

It’s important to remember that people react differently when discussing money. If you’re worried about your partner feeling uncomfortable during ‘the money talk’, Gemma recommends thinking of your finances as “just numbers” to take the sting out of the conversation.

“If you can take the emotion out of it and just say ‘can we get the numbers on a page’, it makes it less anxiety-inducing,” she says.

While it can be uncomfortable to discuss, all our experts recommend having financial conversations early in your relationship and regularly.

“Transparency matters in a relationship and even more in a breakdown,” Gemma says. “But make sure you get help if you need it too.”

Log into your super

Many Australians have a mental block surrounding their superannuation and don’t think of it as their money. But super can be the most significant financial asset that you own.

“It’s very hard to get people thinking about retirement until they’re closer to it,” Helen says, “But we can only impact the future – not the past – and every little bit counts. Even just getting online, looking at your account balance and knowing that’s your money is really important.”

Martina says the question many women ask is: “How much should I aim to have in my super?” The oft-cited million-dollar number can make many people switch off because they don’t think it’s possible to accumulate that much in their fund.

“It’s a myth – you don’t need a million dollars,” she says. “Go to the MLC website and there’s content to help you work out a realistic target. This will help you think about the next phase.”

If you’re taking a career break or think it’s on the cards, Bianca says it’s critical to work out if your employer pays superannuation on parental leave. It’s also useful to think of innovative ways to top up your super while on leave.

“When I was on maternity leave, I used to match the cost of nappies each week in my superfund,” she says.

Do your research

Despite progress, the gender pay gap persists, putting an extra hurdle in front of women and their finances. A simple step women can use to improve their finances is to stop underselling themselves at work and ask for the salary they deserve.

Gemma suggests doing your research first. It’s often hard to divorce yourself emotionally from what you feel you deserve to be paid but, by understanding your industry, you can better illustrate your contribution – and your worth.

“You’ll have a more objective view of your worth and you’ll go into that conversation with more confidence,” she says.

Our experts don’t suggest sacrificing flexibility for pay. Increasingly, workplaces are becoming more flexible and they say there’s no reason you can’t enjoy that and a better salary.

Take a financial day out

Above all, our experts agreed it’s critical for women to engage in their finances if they want to be financially fearless. Bianca’s advice? Take a financial day out. Dedicate some time on a Saturday morning, or whenever you have time, to look at your overall finances.

Once you have a clear grasp of your income, liabilities, assets and expenses, it will become obvious what you need to focus on – whether that’s paying down debt, saving or investing.

Gemma suggests once you decide on a course of action, automate it. Using apps and technologies to take the decision-making out of the process makes it easier. “You’ll find in 12 months that mortgage will be paid down a little more, or you’ll have a saving account with a couple of thousand in it,” she says.

Helen agrees the first step in owning your finances is hardest, but it’s also the most important. “Work out what you want and then seek help,” she says. “Don’t be afraid to ask – nobody has all the answers but you’d be surprised how much advice is out there.”