We are all hard-wired to react to outside stimuli. Deep in our brain, the amygdala makes sure of that. This pea-sized structure has us ready to stand and fight, or run and hide, depending on what life throws our way.
By David Andrew
In the past few weeks, we have seen world financial markets get the jitters on the expectation that the US could be headed for recession. If that’s not enough, we have the US presidential election, the slowdown in an increasingly belligerent China, and ongoing tensions in Eastern Europe and the Middle East. There’s a bit to worry about, right?
Globalisation suddenly looks less secure than it did. Trade protection is rising along with political tensions. In response, the US is onshoring manufacturing capability fuelled by some of the lowest energy prices in the world. We’re not writing the US economy off just yet. In fact, we could see a huge resurgence in US manufacturing capability.
With all this uncertainty, we are likely to see greater economic dislocation and market volatility rather than less. That’s likely to be uncomfortable.
So, how can you think about your financial security amid these fluctuations.
Risk is what you don’t see coming
First, let’s focus on risk. It’s important not to confuse uncertainty in the world, with risk. You see, we can plan for uncertainty, but it’s harder to plan for risk, because risk is what we don’t see coming. The global financial crisis and the pandemic are great examples of real risks we didn’t see coming.
Conversely, global tensions and market uncertainty are predictable, we don’t know exactly what they’ll look like, but because we expect it, we can plan for it.
During the GFC and the pandemic, we learnt that the medical professionals who suffered most did so because of overspending and too much debt. The good news is that these issues can be resolved with good planning.
The other big cost during the GFC and pandemic was for those who sold down their investment portfolios in the expectation that there was much worse to come.
Here’s what every successful investor knows
Markets will be volatile, sometimes downright scary. If you panic during these periods, you’ll likely lose. Until a couple of weeks ago, we had had more than 350 consecutive trading days without a single market decline of two per cent or more.
Investors love these calm waters. It gives you confidence. But then the market did something it does often. It went down. A lot.
The financial press immediately went into fear reporting mode. One headline from The Australian read, ‘ASX plunges: $100 billion wiped off stock market value.’
It’s hard to understand the drama when, typically, we get market pullbacks of at least 5% on average three times every year.
So, here’s the point. While it might feel prudent to exit the market during a volatile period, all successful investors know that short-term fluctuations are meaningless if you have a positive view of long-term expectations. Great investors use periods of volatility as opportunities to buy good long-term assets at cheaper prices.
What we can learn from the affluent
The Millionaire Next Door is a timeless classic first published in 1996. It chronicles the factors that lead to financial success. It’s one of those books I’ve read countless times and each time I uncover a new gem.
The biggest financial challenge faced by many medical professionals is that being well-educated with a high-income does not automatically translate into financial independence. That’s a frustrating truth, but we have seen many cases where financial independence is elusive.
There are many reasons getting in the way of financial success, and these include the embedded cost of living in high status suburbs, the cost of funding a significant debt burden, providing economic life support for children, and a lack of time to focus on wealth accumulation.
Those who achieve financial independence either understand these challenges or find the answers they need to get on the right track. The good news is that financial independence is available to every medical professional. Even better, there’s a systematic way to achieve it.
In an increasingly uncertain world, having a clear plan for financial independence will give you an anchor point, a repeatable way to harness good habits to keep moving in the right direction.
The thin veneer of affluence
Many years ago, we worked out that the appearance of affluence can be a thin veneer. It means you need to be careful who you admire and seek to emulate, and need to be mindful of who you look down on and wish to avoid becoming.
What we’ve discovered is that many medical professionals living affluent lifestyles consume almost all their income in funding their lifestyle. This reveals an uncomfortable truth. Financial independence for these individuals is virtually impossible.
Any assumption that the appearance of affluence equals sustainable, long-term financial success is dangerous. Its important to run your own race, have your own plan, and celebrate your own success.
Remember, no one is as impressed with your possessions as you are.
Three critical outcomes
Freedom of time is the biggest challenge facing medical professionals, and we meet very few who describe themselves as being in ‘lifestyle’ mode – the medical system just doesn’t seem to work that way. It’s more common to be pulled from pillar to post with the demands of a busy practice and family life.
Our research shows that truly prosperous families all seek three critical outcomes.
The first is a desire to make smart decisions with their money. This covers cashflow, tax, structuring and planning. Earning a big income and having little to show for it isn’t much of a prize and truly prosperous families understand this.
Next is a desire to ensure everyone they care about will be okay, no matter what. This covers financial security, education and opportunity, right down to helping children learn good money habits and avoiding parental economic dependency.
The final outcome is to live the best life possible. This includes finding the right balance between living well today and securing financial independence for later. We describe this as a journey towards freedom of time, money, relationships and purpose.
Taking control
Taking control of your financial future requires leadership and commitment and it begins with you. This leadership is important to protect your financial interests, achieve your goals and reinforce a positive money culture in your family.
As with every other aspect of your life, accepting personal accountability for managing your money increases the likelihood of a positive outcome. But taking control isn’t always easy or practical. That’s where having a family CFO (Chief Financial Officer) as the primary wealth manager for the family can be a huge advantage. A clear plan with help to implement and stay
on track is a gamechanger.
The economy will always be uncertain and financial markets will be volatile and at times scary – you just need to factor this into your plans. The next 20 years will present economic challenges and opportunities that the purposeful will embrace and profit from.
If you have questions about our family CFO service, contact me personally at dandrew@capital-partners.com.au