Divorce is wrought with emotions – fear, uncertainty, maybe even anger. Add a global pandemic and bear market to the mix and it can be nearly impossible to feel as if you are making any decisions with clarity. You are likely seeing account values drop before your eyes, which in turn is decreasing the size of your potential divorce settlement. So, what should you do?
Keep a long-term perspective.
Naturally, you may be hyper-focused on every single penny as you work on settling your divorce. But when it comes to the assets that are invested, it is important that you keep a long-term focus. These funds were likely invested for financial goals down the road, such as retirement. Ask yourself it that will still be the purpose of those funds after your divorce. If so, it is best not to make any drastic changes to those investments right now. Keep in mind the losses you are seeing right now aren’t realized until you actually sell. Markets are cyclical and bear markets, such as the one we are currently experiencing, happen fairly regularly. In fact, since 1927, the S&P 500 has experienced 14 different bear markets (a drop of more than 20% from the last peak). This is fine for money that you won’t need for 5-10 years, since markets will likely recover from a drop in that time. Over the long run, having some portion of your investments in stocks is the best place to earn a higher average return.
Monthly Growth of $1 from 1926 to 2018
Think about your cash needs.
It is likely that your financial outlook will change in some way after your divorce. You should start thinking about this before the divorce is final, as it may change some of your settlement decisions. Your cash-flow needs should be broken down as follows:
- Short-term: This is any money you will need in the next 2 years or less. This could be living expenses not covered by income or other financial goals such as home repairs or a new vehicle.
- Mid-term: Money you won’t need to spend for another 2-7 years. Examples might include paying for college for a child/grandchild or buying a new home.
- Long-term: Your long-term money are funds that you won’t need to access for at least 7-10 years. These are typically funds set aside for living expenses in retirement.
Each of these categories should be invested differently. Of course, it is up to you to determine what these cash needs are so that your financial advisor can help you make the best investment decisions.
Re-evaluate your risk level.
You could find that the investments that were appropriate for you before your divorce are no longer a good fit. If you are losing sleep at night and think you need to make some changes, it is likely that you need to re-evaluate the risk you are taking. When considering the amount of risk that is appropriate for you, there are three things to consider:
- The amount of risk you need to take.
- The amount of risk you can afford to take.
- The amount of risk you are comfortable taking.
Deciding how you invest your money should consider each of these aspects of risk – not just one. For instance, you may NEED to take a little more risk than you are comfortable taking in order to afford your spending goals in retirement. On the other hand, you may not be able to afford to take much risk. It all depends on the timing of your cash needs. However, it is very unlikely that you should move everything to cash right now.
Focus on what you can control.
Believe it or not, you have zero control over what the stock markets are doing, no matter how hard you stare at the charts every day. Instead of wasting your time and energy focusing on something you can’t control, you should focus on the things you have complete control over. You have total control over how much you spend, when you retire, and sticking to a long-term investment plan – even when markets are doing scary things.
It may seem easier said than done to think about these things in the midst of a divorce, but fortunately there are professionals that can help you make these decisions. A major life transition, such as a divorce, is the perfect time to create a new financial plan with a Certified Financial Planner™. The planners are trained to help you make decisions about the topics mentioned above and working on a financial plan is the first step to feeling in control of your finances – even when everything else in life feels out of control.