Prepare your portfolio for natural disasters

Tuesday, October 25, 2011
By Julie Wiegan


Natural disasters such as tornadoes and tsunamis, whether local or international, can have a great impact on international economies and markets. You may not be able to control the occurrence of natural disasters, but there are steps you can take to limit its impact on an investment portfolio. Tetsu Tanimoto, Managing Director of Investments for Merrill Lynch Wealth Management shares his top 5 tips for preparing your portfolio.

Diversify Investments
The safest portfolios are those diversified by several factors, including sectors and industries. This kind of portfolio has the ability to withstand a multitude of unpredictable events, such as impacts to international industries and markets caused by droughts, storms and fire. Diversification may not ensure a profit or protect against a loss in declining markets, but a widely diversified stock portfolio can help you weather downturns and even take advantage of markets as they improve.

A portfolio that includes a mix of overseas investments is another way to protect your investments in times of international financial stress. If a major disaster reduces the value of a currency in the international marketplace, having your portfolio anchored in various international currencies can keep your plan on the right path.

Establish Access to Liquidity
For a country in crisis, quick access to liquidity is vital. The same is true for the investor. In light of recent market events, having a strategy for cash allocations is key. A portfolio of financial assets that consists of cash, bonds, listed shares or listed property securities can be an important source of liquidity. Work with your financial adviser to determine the size of the cash holdings in your investment portfolio, should a disaster trigger a market downturn.

Don’t Panic
When a disaster occurs, and they will occur, it is important to think rationally, not emotionally. Do not panic – pulling assets out of the market without strategic consideration can exacerbate any existing problems. If your portfolio is well-designed to support your short-term needs and long-term goals, allow time to calm your emotions rather than immediately plunging into an overly conservative mindset. According to the Merrill Lynch Affluent Insights Survey released in January 2011, 64 percent of affluent Angelenos who describe themselves as conservative investors invest conservatively to avoid losses resulting from market turbulence. Don’t let a bad market experience spook you from rebalancing your portfolio and reassessing your options – staying invested in equities can help position your portfolio to take advantage of markets as they improve.

Review Your Portfolio
Take a fresh look at your portfolio at least once a year. This can help ensure that your portfolio is properly diversified, accounting for your needs and the current state of the global economy. How are international markets doing, and are your investments properly aligned? When markets move strongly in one direction, the result can take your investment plans off course if you aren’t properly prepared. Examine the news to understand if there are current and anticipated events that prompt a reassessment of your portfolio. With your financial advisor, conduct a sensitivity analysis of your portfolio and re-adjust it for any potential issues.

Organize Documents
Have your paperwork in order by keeping copies of important personal documents and scanning and storing them electronically. This includes social security cards, birth certificates, passports, and insurance forms. If you do come face-to-face with a disaster, having these papers in place will be the most important step toward recovery.

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