Managing Uncertainty: how to personalize a strategy.

In my previous article, Risk vs. uncertainty: you are playing the wrong game, I suggested that you need a different set of tools when solving for uncertainty. When building a personalized financial structure hedge -- you need to build a boat.

The article examined the differences between risk and uncertainty. This piece will help you think through building your personalized solution and how to manage uncertainty.

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Clarify the puzzle.

The most efficient way to manage uncertainty is to create a comprehensive financial structure hedge.

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It is crucial to focus on your full financial structure not just your liquid investment assets.

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This includes your homes and mortgages. It also includes any other assets on your balance sheet such as privately held businesses, illiquid investment properties, or other private assets.

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Your financial structure is also made up of your future resources like your human capital, social security, and pensions.

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These assets are not on your balance sheet today, but they often dominate many households' financial structures.

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For example, if you are a 30-year-old early in your career with a $250k salary, the present value of your human capital could be around $4 million.[1]

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For many retirees, social security is a meaningful financial structure resource. The present value of their social security is ~$1.2 million for the average household. Regardless of balance sheet size, these are important resources to factor in when creating a full financial structure hedge.

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The next part of any financial structure is determining what outcomes you are trying to achieve. What is the purpose of the resources we just outlined? How will you allocate your capital?

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It is important to clarify the problem we are trying to solve.

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Personalize the solution.

Now let's personalize a solution that hedges against uncertainty.

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Step 1: Identify the resources you are working with. The image below summarizes the pieces.

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Step 2: What are our priorities? How do you want to allocate your capital?

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Step 3: Address all risks.

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How are your resources exposed to market, property, and personal risk? This is different for everyone.

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A household with 90% of its wealth in public equities has different risk exposures than someone with 10 rental properties all of which have large mortgage balances. Neither is right or wrong. Just different risks.

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Step 4: Personalize a comprehensive strategy.

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Below are some common events that cause financial structure stress.

?Here is a summary of how you may think about hedging against them.

Tailor and implement.

Your household resources, priorities, and risks will evolve over time.

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You will encounter new challenges both good and bad that will influence how you want to allocate your capital.

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It is your job as the owner of your financial structure to direct. This includes establishing priorities, making informed tradeoffs, guiding wealth management applications, and controlling through iteration.

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Some households can then strategize and implement everything we discussed on their own.

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Others may determine it is in their best interest to have someone do this for them.

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This is what I help clients do – build a strategy on how to manage uncertainty and implement all the moving pieces around it.

If you would like to get a no-cost 2nd opinion, you schedule a 20-minute call with me.

Subscribe here?if you want to receive my client communication and newsletters.

?Drew Lunt

Scratch Capital

[email protected]

208-901-8018

Disclosures and Sources

Advisory Services are offered through Scratch Capital LLC, an Investment Advisor in the State of Idaho. All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication or future results. Purchases are subject to suitability. This requires a review of an investor’s objective, risk tolerance, and time horizons. Investing always involves risk and possible loss of capital.

[1] $250,000 gross salary, 35 years of earnings, 30% effective tax rate, 2% real earnings growth, and 5% discount rate.