VUCA - Dealing with uncertainty

When you live in volatile and uncertain times, should you put your long-term plans on hold?

Read or watch the news, and you’ll encounter a world that’s volatile, uncertain, complex and ambiguous. Those characteristics can make the task of planning for you and your family’s future feel all the more daunting.

Yet if you feel the weight of the challenge, you are not alone. Indeed, following the collapse of the USSR in 1991, the US military was so exercised by the challenges associated with these factors that it even gave them an acronym: VUCA.1

VUCA is also highly relevant in the context of saving and investing your money, and has particular financial meanings and implications:

• Volatility is ubiquitous in financial markets. Values go up as well as down, whether that's for shares, bonds or currencies.
• Uncertainty is an accepted part of investing – the past doesn’t necessarily equip you to predict the future. The direction of the US-China trade war, Brexit outcome, Donald Trump’s impeachment, who will win the next US election, and how the world will respond to the existential threat of climate change, are just some of the uncertainties facing today's investors.
• Complexity refers to factors or variables that muddy the financial picture. In today's markets, that includes everything from negative interest rates to fake news – the latter can impact markets significantly in a matter of seconds.
• Ambiguity is the feeling that these unpredictable elements can create – reality is rarely black and white. What happens when we become a cashless society? Will sovereign bond yields stay negative? Where and when should we invest our money?

The wide range of current challenges make the world highly unpredictable. In the context of saving and investing, the products and services we need to help us are similarly numerous and complex.

Do you DIY invest, seek guidance, or look for professional financial advice? Do you know your ISAs from your pensions and unit trusts – and how do you choose? Where should you invest? In public or private markets? In equities, bonds, or property? And should you seek out active managers or passive funds?

The weight, number and nuance of such questions can make us yearn for simpler times – and bury our heads in the sand. Yet that will not help you secure a brighter future for you and your family. After all, the average person in the UK will run out of money 10 years before they die.2 What we do with our money today affects not only our quality of life in the future, but our aspirations for that future too.2

But the effects of VUCA can undo that if we are not ready for them, and equipped with the right strategic and critical thinking. One way to counter those effects is to find a good financial adviser, someone who can help you secure your financial future with a well-worked plan that leaves you feeling confident.

To put it another way, dealing with VUCA requires an anti-VUCA:

• Vision. The reality of a 100-year life3 needs to frame your financial decisions, whether that is buying a new home, saving for retirement, or leaving a legacy. Goal-based tools can help you visualise your financial future and think long term. 
• Understanding. Armed with a clear vision of your future, ask what will happen if you spend less and save more. Ask what happens should you live longer than expected, or what happens to your planning if markets fall. Consider the impact of tax, and how your assets and liabilities change throughout your lifetime. Plan to benefit from compound interest.
• Clarity. Understand the impact of key decisions on life events along the way. Ensure you are informed – and feel informed – about the impact of asset allocation decisions, fees, and taxes. Ensure that you won't run out of money.
• Agility. Annual tax allowances can make an enormous difference. Moreover, when financial situations change, you may need to adapt your plans – a regular review can help keep you on track.

Thinking ahead and reviewing regularly can make an enormous difference. A goal-based approach can improve your financial wealth by 15%, according to research by Morningstar, so it can pay off to set your long-term vision, and to remember that time in the market is ultimately more effective than timing the market.4

You’ll then be better-placed to understand the different products and options that can help you achieve those goals; clarify how they will interact with key life decisions along the way; and remain sufficiently agile to make changes when life calls for them.

Finally, if you can seek out expert advice along the way, you’ll give yourself the best chance of making the right decisions – and following them through.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested. The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

1 Source: https://www.vuca-world.org/

2 Source: World Economic Forum, 2019

3 Source: https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/lifeexpectancies/datasets/expectationoflifeprincipalprojectionunitedkingdom

4 Source: https://www.morningstar.com/blog/2018/12/12/goals-based-planning.html