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Predictions for 2022 and Their Value in Financial Decision Making
People love to predict things. Whether it is a football game or a financial forecast, there is no shortage of guesses at what the future will bring. And that’s exactly what they are – guesses. It is true that some are educated guesses, and sometimes those educated guesses are more reliable than pure shots in the dark. But they are still guesses. No human being knows what the future will hold. Even still, especially at the beginning of a new year, we try to make our guesses (educated or not) at what we might see transpire during the year. There is some value in this exercise. After all, we are making financial decisions every day with a set of assumptions – assumptions on interest rates, assumptions on prices, assumptions on how much money we will make, assumptions on demand for our products or services, and even assumptions on whether we’re going to see an economic expansion or recession. So let’s take a look at a set of educated assumptions for 2022.
The only set of predictions I’ve seen so far from someone that fits that category are from Karl Rove. There may certainly be others, but his are the only ones that I’ve read so far. Rove was formerly an advisor for President George W. Bush. He’s a political strategist who has been around Washington for quite some time. He’s also a columnist for the Wall-Street Journal and book author. He’s in the category of an experienced guesser, and you might add to that educated in the ways of Washington. He does this every year and in 2021 made 25 guesses and got about 70% of them right. Pretty good percentage for guessing in my book. Here are a few of his prognostications for 2022: Rove thinks Republicans will take both the House and the Senate in the mid-term elections in November. He thinks inflation will fall from current levels but remain higher than recent years. He expects the unemployment rate to tick down slightly from than the current rate of 4.2%. He thinks that Covid will still be with us in 2022 with even more variants, but that the overall impact of Covid on society and business will be less by the end of the year. On the sports front he guesses that Al Michael’s will be replaced on Sunday Night Football (a prediction I hope he gets wrong, because I happen to love Al Michaels) and that Golden State will win the NBA championship.
Who knows if Rove’s record for 2022 will be as good as 2021, but his thoughts and guesses are, at the very least, thought provoking. Well, if we can’t predict the future, and yet we have to make assumptions in order to make decisions about the future, what are we to do? How are we to operate in a environment where we don’t know the future but we have to make decisions that will impact that future?
First of all, make sure that you have a good defense in your financial decisions in case one or more of your assumptions doesn’t pan out. Let’s say that you expect sales for your small business to increase by 10% next year. What will happen if it doesn’t? If you bet the farm and invest in a massive amount of money in equipment, borrow the money for the equipment, and can’t afford the debt service if your sales expectations don’t pan out, then that is probably not a wise decision. At the very least, it is a high-risk decision. So call it what it is and understand not only the rewards if you get it right, but the downside if you get it wrong. Much of life, and our financial lives in particular, is really risk management. We are identifying the rewards we want to pursue and making sure that the downside risk is worth it. So, ask yourself this question if you are a small business owner: Is the potential downside a good trade for the potential upside? Now, when it comes to defense for your personal finances, if you are assuming your income will increase by 10% this year, what happens if it doesn’t? Have you bought a new house or car based on that assumption? That puts you in a very vulnerable place especially if you borrowed the money to do it. Hope for an income increase but be prepared if it decreases. Limiting your debt is one of the most powerful defensive moves you can make as a margin of safety for your economic assumptions. Debt leaves you vulnerable if things go wrong, and the less debt you have the less risk you have, pure and simple. A solid reserve fund is another great defense to help offset any optimistic assumptions you might have that don’t pan out. It’s not unwise to make assumptions or predictions. It’s human nature, and we must have a set of assumptions when planning for the future. But, it is unwise to be unprepared if those assumptions don’t turn out the way you expect. To summarize our first suggestion, have a good defense or margin of safety in place in case you get it wrong.
Our second suggestion when preparing for the future is to diversify your offense in case your assumptions don’t pan out. The old adage “don’t put all your eggs in one basket” describes this principal well. When you are taking actions for your small business, don’t take a narrow approach, but consider multiple “baskets” in the case of this metaphor. Or to use another metaphor, if you use a shotgun instead of a rifle, you’re going to have a higher chance to hit where you are aiming. We want to have a diversified approach, because it is likely that not all of our efforts will pan out. But if we have multiple approaches or “shots” then we are more likely to succeed. That being said, it is possible to diversify so much that you lose your competitive advantage. If you try to be all things to all people and pursue multiple offensive fronts then you may not do any of them well. Don’t overcorrect and focus on so many initiatives in 2022 that you are not effective in any of them. Identify your competitive advantage, and then try multiple ways to further that advantage in the marketplace. If more work than not, you can chalk that up as a success. Have a diversified approach when it comes to the way you move forward in 2022.
At MBC and Foundation Bank we think we are good at being a trusted guide for small businesses. If you’ve been looking for this but have yet to find that kind of relationship with your bank, we invite you to start your conversation with us today. We’d love the opportunity to meet you, hear about what you are doing for your business, learn what your goals are, and help you navigate that direction well. If you’ve found this podcast helpful, we hope you will subscribe on your favorite podcasting app and share it on social media so that others can benefit from it. Until next time… God bless.
– President Chad P. Wilson, CFP
Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of McKenzie Banking Company / Foundation Bank on January 4, 2022. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. MBC/Foundation Bank is an Equal Housing Lender, Member FDIC.