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The Storm is Here - Will My Portfolio Survive? Thumbnail

The Storm is Here - Will My Portfolio Survive?

Doug Garrison, CFP, MBA - Senior Wealth Advisor



You know you're doing all the right things. You've tried to avoid watching too much financial news. You're trying hard not to let the market volatility get to you. You're not checking your portfolio twice or three times a day. You've listened to the experts who talk about not reacting emotionally, not letting fear drive decision-making.

But despite all this, you sense that we're in unchartered waters.

And you wonder: what's my portfolio going to look like when we get through this?

If you're drawing on your portfolio for living expenses, you may be asking that question with more than casual interest.

Will I have to lower my standard of living? What compromises will I have to make on all those things I had planned to do—trips, new cars, gifts to the kids or grandkids?

Anyone who tells you that the market will come back in so many months, or that they can tell you when we've hit bottom is speculating or outright lying. We don't know whether the market will decline another 25% or 30%. And we certainly can't say that we'll be back to the mid-February highs within so many months.

What can we do?

We can do what we have done: construct portfolios which increase the likelihood of their survival during a tough bear market.

Let's dig into the details—study the blueprints, so to speak.

We start by agreeing with clients on a monthly draw from their portfolio. How much of a monthly "paycheck" do you need, in addition to other sources of cash, such as Social Security or pension payments? We then carve out of the portfolio roughly 18 months of that routine cash need, and put it in cash and near-cash (generally money market funds or very short-term bond funds).

Having cash for 18 months should let you sleep more soundly.


Why 18 months? There's nothing magical about 18 months—but it's about as long as most bear markets last once we've hit bottom. Cash, especially these days, doesn't have much of a return, but it's liquid and doesn't go down in value. If you need to buy groceries and pay for the utilities, having cash to see you through for 18 months should let you sleep a bit more soundly. And that cash gets sent to our clients every month, just like a paycheck.

The remainder of the portfolio reflects the risk tolerance of the client. Most clients are comfortable with a balanced portfolio, about 60% in stock funds and ETFs, and about 40% in bond funds.

Stock funds have historically provided greater returns than cash or fixed income funds. You have stock funds in your portfolio for the growth you expect them to provide over time. Inflation occurs, and you need at least a portion of your portfolio to grow faster than inflation. If not, your standard of living will inevitably decline as it will take more money to buy the same items and services.

Just as an example: look at the price of a first-class stamp—the cost of sending a letter. What took three cents in 1950 cost six cents in 1970, 25 cents in 1990, 44 cents in 2010, and 55 cents today.1 Inflation marches on.

But with their higher returns, stocks bring us greater price volatility, as we are seeing recently. An alternative to selling stocks in a down market is using bond funds, which typically are more stable in price than stock funds. Should the 18 months of cash and cash equivalents run out and we're still in a deep bear market, we could begin liquidating bond funds to fund your monthly "paycheck."

The cost of sending a letter? What took three cents in 1950 cost 25 cents in 1990 and 55 cents today. Inflation marches on.


With a 60% equities/40% fixed income portfolio, clients who adhere to the rough rule of thumb of drawing down no more than 4% of portfolio value each year have roughly ten years of monthly income invested in the fixed income portion of their portfolio. In addition, most of the funds we invest in typically generate dividends, and some make capital gains distributions. More cash to replenish the 18 months of cash and cash equivalents.

We are hopeful that once the medical crisis is addressed, the economy will recover quickly, people will return to work, and portfolios will grow, rather than shrink. We remain confident that the portfolios we have built will withstand the current storm.

If your portfolio could use some repair work or is in need of a better blueprint, give us a call or send us a note. Let's build a solid portfolio.

Let's Talk

1https://en.wikipedia.org/wiki/History_of_United_States_postage_rates

Disclaimer: The information provided here is general and intended as educational in nature. It is not intended nor should it be considered as tax, accounting, or legal advice. Investec Wealth Strategies and its advisors do not provide tax, accounting, or legal advice. We recommend you seek the counsel of your attorney, accountant or other qualified tax advisor concerning your situation.