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2022 has been a challenging year. We’ve experienced the highest inflation in four decades, double-digit losses in both stocks and bonds, the Federal Reserve aggressively raising interest rates, a never-ending war in Ukraine, continued lockdowns in the world’s second-biggest economy, gas prices shooting through the roof, a slowdown in the housing market, and more. Tough times are generally a good opportunity for some introspection. In particular, taking time this year to review some timeless financial planning principles in the context of recent events can help investors improve their process going forward. Below are four important takeaways from this year that every investor should take to heart.

Lesson #1: Maintain a cash cushion

This year has taught us the importance of maintaining a substantial cash position regardless of age or stage of life. In addition to seeing the entire market plummet, we also experienced a weakened job market.

Many investors fixate on the opportunity cost of maintaining too much cash on hand and potentially missing out on an attractive investment. A more helpful perspective is realizing that simply holding enough cash can get you through the bad times relatively unscathed. It provides some breathing room in a bad job market, a buffer for unexpected expenses, and protection against sequence of returns risk for retirees who are withdrawing on their portfolios. Remember, cash is king!

Lesson #2: Avoid portfolio concentration

Virtually every asset class has been decimated this year. Even the bond market fell significantly. Bitcoin, which many crypto evangelists claimed was uncorrelated to the other areas of the market, is down approximately 65% as of this writing.

No matter how strongly you believe in one single investment, no company or area of the market is immune from the occasional downturn. Maintaining positions in a variety of investments can help ensure that you will never be totally wiped out. When one investment falls, others will go up or at least perform better. Diversification is really the only free lunch in investing!

Lesson #3: Plan today for no one knows what the future holds

Unpredictability has been the theme of the past few years. In 2020, the world was blindsided by the Covid-19 pandemic, which impacted the market, work, overall health, and family life. This year investors were caught by surprise as inflation reached a four-decade high, the Fed began to rapidly increase interest rates, and when Russia decided to invade Ukraine. Though all these developments were impossible to foresee at the end of last year, they each had a major impact on every American.

These events were particularly challenging for folks approaching retirement. Their investment portfolios dropped in value even if they were conservatively positioned in high quality bonds. It became harder to downsize, since home values have decreased due to an increase in mortgage rates. Finally, the ramifications of a slowing economy caused many people to prematurely lose their jobs.

While predicting next year’s news headlines or market movements is impossible, preparing for the future is feasible. The key is not procrastinating. This type of planning is best done sooner rather than later and involves the less sexy areas of personal finance like insurance and annuities.

For example, purchasing life insurance can protect your family in the event of a premature death. Maintaining a disability policy can further protect your loved ones in case you can no longer work. Additionally, utilizing a Single Premium Immediate Annuity, or SPIA, can guarantee a stream of income regardless of how the market is performing and can serve as a lifeline if you can no longer work. Finally, getting a jump start on your retirement plans by downsizing as soon as possible can save lots of headaches later. Taking a proactive approach to your finances today is always prudent.

Lesson #4: Lifestyle decisions trump investment performance

We learned this year that you can do everything right financially, but if the market doesn’t cooperate you can still be set back years. This reinforces the importance of making the right lifestyle decisions to ensure that you are on track to achieve your goals. Lifestyle decisions include living within your means, maintaining a high savings rate, and working longer, even part time, if possible. Each one of these decisions can help to effectively hedge against a difficult economic environment.

Furthermore, I recommend clients set aside time to determine what activities, goals, or experiences are and are not important to them. Refining your goals and values is helpful when forming a plan for allocating your discretionary funds. It also helps in determining where you can avoid spending money. Working through this exercise before year-end can help free up cash flow, and allow you to live the life you want, irrespective of what surprises await us in 2023.

This article was written by Jonathan I. Shenkman from Forbes and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to [email protected].