How Sanctions Could Affect Your Financial Plan
As a CERTIFIED FINANCIAL PLANNER™ and a financial coach, I’m reminded daily of a lesson that’s as old as time – expect the unexpected. In the finance-world, and heck – just in regular adult “grown-up” life, you come to anticipate the unexpected. Of course, we never know when or how this something will happen, we just know that sooner or later it will. Some of us play out this concept a bit further and delve into Murphy’s law. If you’re unfamiliar with Murphy’s law, the basic idea is that if something can go wrong, it will. That’s just all our collective and colloquial understanding of an actual, well thought out theory that has become an overused adage (I wonder if Murphy anticipated that, too?).
Either way, when you try to anticipate the market and economy, and strategize ways to grow other people’s wealth for a living, you get used to the idea that things are going to go wrong. The good news is that we take active steps to mitigate the damage from unexpected events. The bad news is that we never know what that something will be.
These old lessons have proven true repeatedly in recent years. (Without sounding like a broken record) the pandemic, economic shutdown, political tensions, and war have been major events that have taken their toll on plenty of people’s financial plans over the past several years. Specifically, the war between Russia and Ukraine has caused a gigantic strain both politically and economically across the world. At the onset of this crisis, it was clear that no one was quite sure what to do. As it continued, sanctions and restrictions of all kinds were put into place to dissuade Russia of any potential upside to continuing the war.
Economic sanctions and restrictions have serious real-world consequences for countries involved. They also have serious personal costs to citizens all around the world whose money may be tied in one way or another to a country in conflict. So, that leads us to the question that we’ll be working on today: How do economic sanctions affect financial plans?
Basics – What are Sanctions?
Let’s first understand the basics. Sanctions are a tool that countries use to try and curtail or influence the behavior of another country. They vary in severity and can affect everything from travel, to assets, to trade restrictions. The Council on Foreign Relations defines sanctions as, “the withdrawal of customary trade and financial relations for foreign- and security-policy purposes." Sanctions may be comprehensive, prohibiting commercial activity with regard to an entire country, like the long-standing U.S. embargo of Cuba, or they may be targeted, blocking transactions by and with particular businesses, groups, or individuals.
So, when you hear someone in the news using the blanket statement “imposing sanctions”, you now know that that could mean a wide variety of things and fluctuate in severity depending on the specific new policies being put into place.
Why are Sanctions in Place?
It’s no secret that tensions have been particularly high in Eastern Europe. Russia’s once-coined “special military operation” has seemingly turned into an all-out war against an independent nation recognized by most of the world. This tension is something that’s been building over many years. Russian President, Vladimir Putin, has stated multiple times that his crowning achievement as president would be to bring back some semblance of the USSR. While I won’t pretend to be an expert in foreign affairs, its not difficult to see the reason behind the war – one country wants to return to their former glory and the other wants to remain a sovereign nation.
These tensions, which bubbled over into war, eventually led foreign nations, like the USA, UK, France, Canada, etc. to impose restrictions on trade with Russia in hopes that they would pump the brakes and reconsider their efforts.
More recently, there has been political unrest in the middle east, and Iranian citizens are seemingly rebelling against their government. It seems that human-rights issues are also causing a set of sanctions to be place in that area of the world.
Ways that Sanctions Could Affect Finances
It should come as no surprise that severe sanctions affecting regions of the world and entire countries might affect trade and the financial sector. Unfortunately, this is just a reality of using sanctions as a tool. However, that doesn’t mean that there aren’t steps you can take to make sure that your financial plan isn’t in jeopardy.
Whether sanctions are affecting specific leaders, industries, or entire nations – it’s very likely that economic warfare will have some impact on your bottom line. Believe it or not, on rare occasions sanctions could actually bolster portions and segments of your portfolio.
How to Shield from Sanctions – Adapting Your Financial Plan
There are several ways to shield your personal financial plan from current and future sanctions. For starters, make sure that you’re keeping an ear to the ground when it comes to political and world affairs – that ought to give you a good idea of what’s to come and contingency plans that should be made proactively. It may also give you an idea of markets and country’s that you may want to steer clear of.
Another possible route to protecting your bottom line from sanctions is through diversification. Proper diversification of your portfolio means that you balance (to an extent) industries and markets. For example, if I were worried about volatility in the oil field I might consider balancing it with “green energy” because it’s likely that if one suffers the other may thrive during that time.
How Sanctions Outline the Importance of a Good Financial Plan/Planner
In my opinion, (call me biased here) one key takeaway from imposed sanctions and their affect on personal finances is that if you aren’t working with a reliable financial planner, you should be. Just think about it for a moment – a financial planner is someone who’s trained to take on the challenges of the evolving world economy and its restrictions. We’re adept at making strategies that can evolve and adapt to specific needs as they arise. We’re also proficient in creating diversified plans with checks and balances to make sure that your financial growth is safe.
However, the most powerful aspect of using a financial planner, in my opinion, is that it frees you to do what you love. Instead of worrying about financial markets, and geopolitical affairs you’re free to be a nurse, be a veterinarian, be an artist, or focus on whatever it is that you love doing. We’re here to work in the background and make sure you’re keeping on track to meet your financial goals and targets.
So, if you or someone you know is interested in how to keep their personal financial plan and portfolio resilient and
Until next time...this is Melissa Making Cents!
Melissa Anne Cox, CERTIFIED FINANCIAL PLANNER™, is a College Planning and Student Loan Advisor and Financial Coach in Dallas, Texas.