Dealing with Financial Risk: Use Proactive Preservation Wealth Strategies
Financial crises aren’t just headlines that garner attention—they’re real events that can affect portfolios, retirement timelines, and day-to-day confidence in the future. Whether it’s a global recession, sudden inflation, a housing correction, or geopolitical uncertainty, downturns have a way of testing our financial fortitude.
There are generally two broad ways to deal with a financial crisis. Many people use a mix of both—reacting when necessary but learning to prepare better for the future:
Reactive: When you are reactive to a financial crisis, it typically involves responding to the crisis after it’s already happened. Steps may include:
- Cutting expenses immediately to preserve cash
- Accessing emergency savings or lines of credit
- Prioritizing bills and obligations, such as mortgage, utilities, and essential insurance
- Negotiating with lenders for deferred payments or revised terms
- Liquidating assets, if necessary, to cover shortfalls
This approach is about staying afloat, limiting damage, and making short-term decisions that keep you stable until markets and returns settle down.
Proactive: Being proactive means planning and putting safeguards in place before a crisis happens. While this approach won’t prevent crises, it can soften the blow and give you more options when the inevitable occurs.
Examples include:
- Building and maintaining an emergency fund (3–6 months of expenses)
- Keeping debt manageable so there’s flexibility in tough times
- Maintaining diversified investments to minimize the risk of large losses
- Having the right insurance coverage (health, disability, life, etc.)
- Creating a financial plan with built-in contingency strategies
At SGL Financial, our Buffalo Grove CFP® professionals work with individuals and families to build wealth strategies that do more than react—they anticipate, which we’ll explore in this Quick Guide.
- What typically triggers a financial crisis?
- How long do market downturns usually last?
- Should I change my investment strategy during a downturn?
Financial crises often begin with a trigger that causes uncertainty for companies’ future earnings—rising interest rates, inflation, debt defaults, or geopolitical conflict. While the causes vary, the result is usually the same: emotional selling, loss of investor confidence, and sharp declines in the market values of vulnerable companies.
It’s important to remember that these downturns are not permanent. Historically, markets have recovered, but how you react during these periods can have long-term effects on your wealth.
Assume the market suffered a sharp correction. You panicked and sold at the bottom of the correction. Consequently, you have less money to invest when the market recovers.
A financial crisis may affect jobs, consumer confidence, and investment portfolios, but history shows that markets tend to recover over time – the variables are when and how long. Understanding what’s happening, and why, can help you avoid emotional decisions that could hurt the pursuit of your long-term goals. You are positioned to weather volatility with a thoughtful financial plan and diversified investments.
Solutions to Consider:
- Avoid emotional decision-making.
- A pre-established, written financial plan can help keep decisions grounded in logic instead of fear.
- Review your financial plan regularly with your financial advisor to ensure it stays aligned with changing conditions without reacting impulsively.
- How diversified should my portfolio be?
- What role do alternative investments play?
- Is it time to rebalance?
Building a crisis-proof investment portfolio starts with smart diversification. Rather than relying on a single asset class, build a well-structured portfolio that includes a mix of stocks, bonds, cash equivalents, and possible alternatives like real estate, precious metals, commodities, or cryptocurrency. The goal is to spread risk without sacrificing long-term growth.
Diversification is your first line of defense. A crisis-resistant portfolio balances growth with stability, often blending equities, fixed income, alternatives, and cash. The mix should reflect your goals, risk tolerance, and time horizon—not what’s trending in the news. If it is in the news, it has already happened.
Regular rebalancing keeps your allocation aligned with your goals and risk tolerance, even when markets are volatile. A crisis-proof portfolio also accounts for liquidity—ensuring you can access cash without selling holdings at a loss. Finally, working with a financial advisor can help you stay focused and avoid emotional decisions when headlines turn chaotic.
Solutions to Consider:
- Diversify Across Asset Classes: Include a balanced mix of stocks, bonds, cash, and possibly alternatives like real estate or commodities. This helps reduce the impact of any single underperforming asset class.
- Maintain Liquid Reserves: Keep a portion of your portfolio in liquid, low-volatility investments (such as money market funds, CDs, or short-term bonds) to cover near-term needs without being forced to sell during a downturn.
- Rebalance Regularly: Adjust your portfolio to align with your risk tolerance and long-term goals—especially after major market swings
- How much cash should I keep on hand?
- Where should I store emergency funds for easy access?
- What if I’m relying on portfolio withdrawals during a crisis?
Cash reserves are the financial buffer that can help you stay grounded when life takes an unexpected turn. Whether it’s a job loss, medical expense, or market downturn, having readily available funds means you won’t be forced to sell long-term investments at the wrong time.
A healthy cash reserve (typically three to six months of essential expenses) lets you manage emergencies without relying on high-interest debt or disrupting your investment strategy.
Liquidity also allows for flexibility when opportunity strikes, such as investing in a down market or covering a large expense without penalty. While cash doesn’t offer high returns, its value lies in stability and access to a buying reserve. It’s not just about safety; it’s about giving yourself time and options to prevent you from tapping into investments at the wrong time – i.e., during a market downturn.
Solutions to Consider:
- Set up a cash reserve strategy that segments your needs. This liquidity ladder keeps your finances moving without forcing unfavorable withdrawals.
- Short-term: Emergency savings in a high-yield savings account or money market fund
- Medium-term: CDs or short-term bond funds
- Long-term: Stay invested based on your risk profile
- Can I use losses to reduce my tax bill?
- Should I consider Roth conversions during a downturn?
- Are there charitable strategies that also provide tax relief?
Having tax strategies in place is especially important during tough times when every dollar matters. Thoughtful tax planning can help you keep more of what you’ve earned and avoid unnecessary losses.
Without a strategy, you risk overpaying taxes at the worst possible time. Working with a financial advisor or tax professional can help you identify opportunities that align with your overall plan—so you’re not just riding out the storm but making the most of it.
For example, strategies like tax-loss harvesting can offset capital gains. At the same time, Roth IRA conversions in down markets may allow you to shift assets into tax-free growth and distributions at a lower cost. Deferring income, accelerating deductions, or using tax-advantaged accounts like HSAs and 529 plans can also improve cash flow and reduce taxable income now and in the future.
Solutions to Consider:
- Tax-loss harvesting – Sell underperforming investments to offset gains and reduce taxable income.
- Roth IRA conversions – When values are down, Convert traditional IRA assets to a Roth to lower the tax cost of the conversion.
- Rebalance using taxable losses – Shift your asset allocation without triggering high tax consequences by harvesting losses.
- Delay capital gains realization – Avoid selling appreciated assets until markets recover or tax brackets are more favorable.
- Maximize tax-advantaged contributions – Contribute to IRAs, 401(k)s, HSAs, and other accounts to reduce current taxable income.
- Strategic charitable giving – Donate appreciated assets instead of cash to avoid capital gains while getting a deduction.
- Qualified charitable distributions (QCDs) – If over 70½, use IRA funds for direct charitable giving, which can count toward RMDs and avoid additional taxation.
- Asset location planning – Hold tax-inefficient assets in tax-deferred or tax-free accounts.
- Defer income – Postpone income when possible to avoid higher tax brackets during volatile years.
- Review and update tax withholding or estimated payments – Adjust to reflect income or investment performance changes.
- What’s the “sequence of returns” risk, and why does it matter?
- Should I adjust withdrawals during a downturn?
- How do I keep my retirement plan on track?
A sequence of returns risk is one of the biggest threats to your retirement plan during volatile markets. This happens when poor market returns occur early in retirement—right when your assets are at or near their highest, and you’re starting to take withdrawals. Even if the average return over time is reasonable, early losses combined with withdrawals can drain your portfolio faster than expected and reduce its ability to recover.
That’s why adjusting your withdrawals during a downturn often makes sense. Temporarily reducing how much you take out can help preserve your asset amounts and buy time for the market to recover. A flexible withdrawal plan,rather than a fixed percentage, can make a big difference later in life.
Keeping your retirement plan on track can help maintain a cash reserve or short-term bond ladder to cover one to three years of living expenses. That way, as noted, you’re not forced to sell stocks at a loss. Rebalancing your portfolio, reviewing spending needs, and working with a financial advisor to update your projections can help you adapt as conditions change. The goal isn’t to avoid market dips by investing in CDs—they’re inevitable—but to cushion their impact on your long-term plan.
Solutions to Consider:
- Bucket Strategy: Segment retirement savings into short-, medium-, and long-term buckets. Depending on age and retirement timeline, keep one to two years of expenses in cash, three to five years in conservative investments, and the rest in more growth-oriented assets.
- Dynamic Withdrawal Strategy: Adjust withdrawals based on market performance. Withdraw less when the market is down and more when it’s up—preserving capital during downturns.
At SGL Financial, our advisors in Buffalo Grove design income strategies that anticipate volatility so your retirement doesn’t depend on market timing.
- What’s the benefit of working with a fiduciary during market declines?
- How often should I revisit my financial plan?
- Can an advisor help me spot any blind spots?
When times are uncertain, having a trusted financial professional in your corner makes all the difference. A fiduciary financial advisor in Buffalo Grove works in your best interest, not for their own benefit. That objectivity is critical when the pressure to “do something” is high.
Solutions to Consider:
- Schedule regular reviews to adjust your plan as life and markets change.
- Get a second opinion on investment strategies that may no longer fit your goals.
- Use technology to stress test your plan under different market conditions.
Why SGL?
At SGL Financial, our financial advisors don’t just build plans, they build relationships. We offer personalized advice that evolves with your needs, helping you prepare for the next market dip before it hits.
No one can predict when the next financial crisis will hit. But you don’t need a crystal ball to prepare. With the right structure: cash reserves, thoughtful investment design, and proactive tax strategies, you can weather market storms with less stress and more control.
If you’re looking for financial planning in Buffalo Grove or want a second look at how your wealth is structured to withstand the unexpected, SGL Financial is here to help.
Want to stress-test your financial plan? Schedule a meeting with one of our Buffalo Grove CFP® professionals to walk through your portfolio, retirement income plan, and tax strategy with a team that always puts your interests first.
