How Strong Is Your Financial Plan in a Storm?

There’s a lot of uncertainty swirling right now, largely because no one included a coronavirus outbreak and its impact on markets in their 2020 forecasts. And no one currently knows how long this virus will remain part of our daily lives. Although economic modeling has advanced significantly over the years, there are still surprises that upend even the most advanced forecasting technology. So, what is the best course of action if you're wondering how strong your financial plan is? Well, knowing you’ve prepared for uncertainty and focus on risk management is a good place to start.

While you can’t foresee the next market-moving event, you can always be prepared for it. The world is complicated and unpredictable, which is why every well-constructed financial plan assumes markets, whatever the cause, will sell off steeply at some point in the future. That’s where the expertise of a human advisor comes in: He or she analyzes your financial picture, beyond just investments, and calibrates all those pieces so you’re well positioned to weather an unexpected storm.


In many ways, when you work with an advisor to build a long-term financial plan, you’re treating your whole financial picture like a large company that’s built to withstand whatever the future holds.

Investing is just one component of a plan, but we believe a comprehensive financial plan also manages risk to make sure you have money for what you need when you need it — no matter the financial market conditions. That’s why your plan should include emergency funds, insurance (including the cash value of whole life insurance which grows over time*), and even considers your budget, or the money you’re earning to meet your needs today.

A good advisor will stress test your financial plan to make sure it holds up in many situations, including unexpected and unpredictable market downturns. He or she will forecast the impact a disability might have on your plan and include an appropriate amount of disability insurance coverage to manage that risk. It could also include a plan to access cash value life insurance or other stable funds that aren’t affected by the market to generate income during a downturn. 

“Stress-testing a client's overall investment allocation in the context of their integrated financial plan ensures that they don't have to sell stocks during times like these and can ride through the short-term volatility that inherently occurs along the path to long-term success,” says Brent Schutte, chief investment strategist at Northwestern Mutual.


With a well-constructed plan that manages your risks, you can feel emboldened to trust the plan and stick with it for the long haul. Stocks, for example, are truly for intermediate- to long-term financial goals. If you have a plan, you shouldn’t need to sell equities during temporary bouts of fear. In fact, a key to market success is to see past these fears and not panic when others do.

Although market declines can be nerve-wracking, this is where a human advisor really shines. They have an objective view of your plan, far removed from the emotions of the moment. They can help you take a step back, revisit the big picture, and remind you that stocks are just one piece of the pie. You’ve already accounted for market volatility. You’re prepared for this. Quite often when you have a conversation about the plan and revisit its core tenets, you’ll find the best solution is to just sit tight and do nothing at all. This is all easier to do with a well-diversified base of assets. 

You’re prepared for this, because we've prepared you for this. We’ve been managing risk as a company for more than 160 years, and the ways we do it aren’t radically different from your plan.


How do we know so much about managing risk? Because planning for risks is in our DNA. A steadfast focus on decades-long time horizons, not one year to the next, helps us achieve the highest financial strength ratings of any company in the insurance industry**. It’s why our view of long-term financial planning is built on a foundation of insurance and investments. 

Our legacy as a life insurance company that, today, combines insurance with investments gives us a unique perspective about managing risk while also nurturing growth. Whether it’s paying your disability or life insurance claim when appropriate, or cash value growth of whole life insurance (that grows over time even when markets decline, provided premiums are paid), to keep our promises we've needed to be financially strong through wars, the Great Depression and whatever may cause markets to correct in the future. You do, too.

We’ve been through market shocks before, and that seasoned approach to generating stability and growth is the basis for how our advisors build your personal financial plan. It all boils down to this: Financial strength combines savvy risk management with a focus on balancing the needs of today with long-term growth.

We’re built for times like this. We’re a company for all economic seasons, and we came into this year the strongest we’ve ever been in our history," says Mike Carter, chief financial officer at Northwestern Mutual. 

And one of the best ways to manage risk is to simulate it long before you’re living it. Insurance companies and other large financial firms do this frequently by conducting stress tests on their business operations. For example, Northwestern Mutual has been preparing for low interest rates since 2010, and low rates have been baked into our assumptions and models for years now. Stress tests essentially simulate extreme events and show how all the components of the business would fare in each scenario. Similarly, an advisor sees how your financial goals would fare in any number of environments — including a market decline.

“Our stress-testing has demonstrated Northwestern Mutual is not only prepared to weather an extreme event but continues as a financially strong enterprise,” says Jason Klawonn, SVP and chief actuary at Northwestern Mutual. “Based on the latest information, while the novel coronavirus is serious, it is not nearly as severe as the most extreme outbreaks we model.”   


Passing the stress test proves we can fulfill our promises today and also remain in position to do that every single day for decades to come. Every day, significant cash flow comes into the company via premium payments and goes out to pay claims and other obligations (just as you earn an income and pay bills).  We also set aside a portion to fund future claims and benefits to policyholders in the General Account*** portfolio, which financially backs up the products, like life insurance, that we offer.

The General Account is a diversified portfolio of assets that generate long-term growth. Most of the assets the account owns have lower default risk such as investment-grade bonds and some are riskier like stocks and high yield. Either way, like the investments or even cash value life insurance in your financial plan, the General Account is for long-term growth. Because we're so focused on long-term stability, and our General Account portfolio is well-diversified and conservatively managed, headlines driving market movements from one month to the next are much less important.

“The asset classes that have experienced the greatest short-term decline as a result of the coronavirus news have had little impact on our long-term portfolio," says Ron Joelson, chief investment officer at Northwestern Mutual. “In fact, our exceptional liquidity — cash continually flowing into the portfolio that we're free to invest — enables us to avoid selling during these short-term declines and still take advantage of attractive buying opportunities that arise when fear-driven markets overreact.”

When it comes to long-term planning, we think strength begets strength. We’ve gotten pretty good at growing and managing risk since 1857, and that superior financial strength, in turn, backs the tools, products and resources our advisors use to build a financial plan that grows with you and is resilient to surprises along the way.





*Your policy's cash value typically becomes a useful source of funds only after several years of premium payments, which allows the cash value to build up. Each method of utilizing your policy's cash value has advantages and disadvantages and is subject to fees and different tax consequences.

**Northwestern Mutual continues to have the highest financial strength ratings awarded to any U.S. life insurer by all four of the major rating agencies: A.M. Best Company, A++ (highest), April 2019; Fitch Ratings, AAA (highest), August 2019; Moody's Investors Service, Aaa (highest), September 2019; S&P Global Ratings, AA+ (second highest), August 2019. Thirdparty ratings are subject to change. Ratings are for The Northwestern Mutual Life Insurance Company and Northwestern Long Term Care Insurance Company.

***Policyowners are not investing in the general account portfolio when purchasing insurance or annuities, but are buying products backed by the financial strength of Northwestern Mutual. The vast majority of the company's managed assets back most of its life, disability income and portfolio income annuity liabilities. The investment strategies described apply to the investment of those assets. A portion of managed assets back the remaining liabilities (primarily fixed deferred annuities and income plans), which have different investment exposures

All investments carry some risk, including loss of principal invested. No strategy can guarantee a profit or protection against loss. Views expressed are as of the date of publication and subject to change.


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