Is disaster protection possible?

Earthquakes, floods, forest fires... Financial crises aren't the only unforeseeable events. Mother Nature herself sometimes throws us a few curve balls. And these can play havoc with our financial security, too.

As the summer begins, we can only express our solidarity with our fellow Canadians in many regions, who have been devastated by natural disasters this spring. To lose one's most valuable possessions to the floods or flames is exceptionally painful.

After the massive earthquake that hit Japan in March, such tragedies raise an important question:  is it possible to take preventive action to minimize the impact of disasters on our financial position?

Living through it

It's virtually assured that some day a flood, tornado, ice storm, prolonged power outage, or some other “disaster” will strike your home. Here are some tips to soften the blow.

Review your property and casualty insurance
Make sure you understand all the clauses of your policy. Are natural disasters excluded? This is often the case, especially in high-risk locations. Can you add coverage against specific risks such as earthquakes, sewer backups, etc.?
Make a list of your possessions
If a disaster destroys your possessions, your priority will be to replace them. Make a list, preferably with photographs, and keep it somewhere else - not in the house. You'll be able to use it when you have to file a claim.
Make copies of your important papers
Keep copies of important papers in another location, as well. Having copies of birth certificates, licenses, deeds, mortgages, your latest income tax returns, proofs of insurance, etc., will minimize administrative red tape.
Prepare an emergency kit
Have a small box that you can quickly grab if you are evacuated. In it, keep copies of your important documents, copies of prescriptions and any medications you or your children require, some money, and a backup of your computer files.
Prepare an emergency list
If an emergency kit seems like overkill, at least make a list of things you would want to take with you. It's much easier to make such a list now than in the middle of a crisis.
Keep an emergency fund
Always have the equivalent of a few months' salary in liquid investments. If you can't work for a period of time, or if you need to rehouse your family, this cushion will be invaluable.

Feeling it from a distance

Sometimes, however, you can be affected financially by an “act of God” even when you aren't a direct victim. This is the case when the markets react to an event such as an explosion on an oil rig or a volcanic eruption. If we add political crises and armed conflicts, the issue becomes not if, but when your investments are some day affected by a far-off crisis.

In the long term, everything will be fine
History shows that, over many years, the markets always tend to grow. If your investment horizon is very long, patience is the best strategy. The problem, as the great economist John Maynard Keynes said, is that in the long run, we are all dead - and in the meantime, you might need your money. Here's some tactical advice.
Know your horizon
The key is to properly identify the time(s) that you might need your money. You don't want to be cashing in your chips - at the start of retirement, for example - at a point when the value of your investments has just plummeted. With the help of your financial services professional, devise a Plan B:  where will you get money if a crisis occurs just when you need some cash?
Have some liquid assets
The best approach is to keep a portion of your investments in asset classes that are historically less volatile, such as the money market or bonds. You can draw what you need from this source during the time it takes for your other investments to recover.
Diversify your risk
Be careful, though:  don't forget that each asset category has its own risk:  capital risk for equities, credit and interest rate risk for bonds, inflation risk for liquid assets. Your portfolio has to balance these risks.
Be disciplined
Your capital will be less risk-sensitive if you stay disciplined about saving, no matter what. A savings plan where you invest the same amount each month will allow you to buy more units when prices are low, and fewer when prices rise. The result is reduced long-term volatility in your portfolio.

And lastly, why not set up a small aid fund within your portfolio that you can use to help disaster victims - just to keep things in perspective? After all, our troubles are pretty minor compared to those faced by the people who have lost everything.