A few weeks ago, I was enjoying time on the lake when my boat broke down. Thankfully, my cooler was full, the sun was shining, and I was in good company. But that didn’t change the fact I was still stranded in the middle of the lake with nowhere else to go.
As I was floating helplessly, I couldn’t help but think of where the markets were that day. For anyone invested right now, it feels like we’re sinking. But just as boats have lifejackets to keep you afloat, your financial life should have its own lifejackets in place to help keep you from sinking in bear market times like these.
The first lifejacket for anyone regardless of age/stage-of-life, should be an emergency fund. A good rule of thumb for an emergency fund is 3-6 month of living expenses saved in cash. This will help protect you from any unforeseen events, such as medical expenses, home/auto repairs, unemployment, etc.
The second lifejacket is for those nearing or in retirement. With income shutting off, you’ll need to fund your expenses in new ways. Social Security and any other deferred income sources, such as IPERs or pensions, can create some lift. However, additional cash needed to meet living expenses will likely come from your portfolio. This means that your investments are now a key source of maintaining your standard of living. The need to protect the longevity of your portfolio as a funding source may be more important than at any previous point in your life.
A good lifejacket may be one we can put on when this time comes is adding preservation assets to your portfolio; think fixed income/bonds/cash. The amount of preservation assets needed in your portfolio comes back to your expected cash flow needs. We like to protect 6-8 years of your projected portfolio withdrawals in preservation assets. Looking at the data below, this is how long it has taken some of the longest bear markets to fully recover.
Data Source: DFA Returns Program. Stock Market Returns are calculated using the MSCI ACWI IMI NR USD Index. Fixed Income returns are calculated using the Bloomberg Barclays Us Aggregate Bond TR USD Index. Charts shown are for informational purposes only and not reflective of actual investor experience.
Data Source: DFA Returns Program. Stock Market Returns are calculated using the MSCI ACWI IMI NR USD Index. Fixed Income returns are calculated using the Bloomberg Barclays Us Aggregate Bond TR USD Index. Charts shown are for informational purposes only and not reflective of actual investor experience.
Data Source: DFA Returns Program. Stock Market Returns are calculated using the MSCI ACWI IMI NR USD Index. Fixed Income returns are calculated using the Bloomberg Barclays Us Aggregate Bond TR USD Index. Charts shown are for informational purposes only and not reflective of actual investor experience.
There will be more bear markets in our lifetime. When they happen, you want to have enough preservation assets so that you won’t be forced to sell the stock (or growth) side of your portfolio at a loss to meet your cashflow needs. In addition to this, as you can see from the data above, the bond market produced double-digit returns during those downturns. This diversification may provide additional help when the stock market is sinking.
Whether you’re on a boat or managing a portfolio, it’s important to have lifejackets on board to keep you afloat. Eventually, I made it safely back to shore with the help of the local marina. If you feel like you’re stranded in the middle of the lake with your portfolio, we’d love the opportunity to help. Give us a call.