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First, getting the rest of your financial house in order reduces the odds that you’ll make a poor long-term move. This may include pulling out retirement savings to meet short-term needs, or perhaps making a rash buy or sell decision based on near-term fear. Having a balanced financial position lets you keep your eyes on the future.
Second, understanding your financial risk allows you to strategically take more risk if the opportunity arises. Let’s say the stock market falls by 50%. If you have a time horizon of five or more years, this likely presents a fantastic buying opportunity. But you don’t want to overstretch yourself. Knowing where you stand financially empowers you to make bold, long-term decisions in a snap.
Consider Imperial Oil (TSX:IMO)(NYSEMKT:IMO). Shares fell 60% during the COVID-19 flash crash and have yet to recover. It’s not hard to see why. This company doesn’t control its own future. It lives and dies by the price of oil. Lower selling prices and high productions costs were always a source of danger for the business.
Then you have stocks like Brookfield Renewable (TSX:BEP.UN)(NYSE:BEP). Shares are 50% higher than when the year began. That’s because Brookfield’s renewable energy projects are low cost and typically have 100% contracted cash flows. That’s a recipe for resiliency in any operating environment.