For better or for worse

Most of us are hoping for a more stable year in 2010 that builds on the 22% rise in equity markets in 2009.

However, not all the portents are good:

• Weak growth in China; China growth supported global markets in 2009 and any withdrawal of support is bound to have a significant impact.
• The property market could stall again, as negative equity persists and the huge number of US sub-prime mortgage renewals falls due in 2010.
• We may see further trouble with the banks, particularly the weaker US and European banks.
• Withdrawal of Central Bank stability measures that have supported markets in 2009
• A UK gilts crisis as investors shun a heavily-indebted UK Government; this could be exacerbated by a hung parliament; a new Government will have to raise interest rates to attract the money it needs; possible loss of AAA credit rating.

Whilst hoping for the best prepare for the worst by identifying what you can control, such as spending, saving and asset allocation, to offset the negative impacts of the things you cannot, such as inflation, interest rates and markets.

So how can you prepare for the worst?

• Set realistic spending plans to keep cash flow positive
• Aim to save 12% of earned income every year whilst working
• Maintain adequate (but not excessive) insurance.
• Control debt (the Institute of Financial Planning suggests net assets should be three times total debt, and net income should be four times debt servicing costs)
• Maintain emergency cash of three to six months’ expenditure; have sufficient cash to cover 12 months’ debt repayments.
• Develop an asset allocation based investment policy to achieve your goals; run a multi-asset class portfolio incorporating your tolerance to risk; look for and take advantage of global investment opportunities; invest for the long term.

There is no need to retrench in 2010 but a realistic and organised approach to money will let you take advantage of opportunities as they arise.