By Andrew D. Burish
A good long-term investment strategy means staying the course when times get tough. With an up-and-down market, unexpected changes can cause stress and lead to poor decision-making.
While it’s critical to focus on the long term when it comes to investments, a “liquidity strategy – which is designed to provide short-term cash flow and act as a buffer against financial distress – is equally important during a volatile market.
It doesn’t take much for a financial challenge to arise … maybe a failed business venture, unexpected medical bills or a drop in the stock market. With a liquidity strategy in place, however, you can help mitigate this risk and maintain your lifestyle in the short term until you get back on your feet.
How do you ensure you’re able to focus on liquidity during turbulent times? With a little bit of planning, you can create a lasting strategy that can help meet your needs.
Understand your expenses
An essential first step is knowing how much you spend each month. You probably have a general estimate of your necessary bills: mortgage, food and utilities. But go beyond those and understand the amount of money you will need each month to keep living comfortably over a period of months or even years. This number can serve as a base and allows you to take a critical eye to your expenses. Note what could get cut, if necessary, when you’re facing financial hardship.
Start with an emergency fund
Typically, emergency funds cover about three to six months of expenses. However, this doesn’t always consider ever-changing, real-life factors.
Take unemployment, for example. Fluctuations in the labor market and desired skill sets have the potential to extend a job search. Thus, having four months of expenses might not cover your needs.
In an ideal world, your emergency fund should offer you a margin of safety that will allow you to hold on to your current portfolio assets and give you the cushion you need to ride out volatility. Up to a year’s worth of expenses in an emergency fund can cover the needs of most people.
Have a stable source of cash flow
After retirement, one way to provide a cushion during down times is to have a stable cash flow to pay your expenses. A liquidity strategy can help. It can include income from Social Security, pensions and annuities and, if those sources don’t fully cover your expenses, part of your portfolio as well.
Consider holding enough assets in your liquidity strategy to help cover anywhere from two to five years’ worth of expenses, depending on what your needs are. In general, your Liquidity strategy should be sufficiently sized to provide the cash flow you need during a “bear market” so you won’t have to sell equities or significantly change your goals and objectives during a downturn.
Investigate your borrowing ability
While it’s not always recommended to turn to debt in difficult times, there are conditions when this might be unavoidable. You need to know that you can borrow in case of emergency.
Borrowing against a portfolio or relying on a home equity loan isn’t considered part of a liquidity strategy in general. However, accessing a line of credit can provide the cushion needed to make it through stretches of volatility when a short-term cash influx could prove useful.
Emotions can often take over during times of anxiety, and a volatile market is a stressful time. These situations make it easy to panic and sell during bear markets, or worry that your current investments will become depleted, especially if you’re in retirement.
Avoiding impulse decisions. Sticking with your long-term investment strategy is imperative. It’s often during bear markets when potential investment opportunities appear. Position yourself to capitalize on them for the future.
Stay the course
Markets are unpredictable, but that doesn’t mean your investment strategy has to be. Planning for every stage of your financial journey can help you manage tough times with a clear head and give you confidence that you’ve made the right decisions — both for the short and long term.
Burish is founder and managing director at The Burish Group at UBS Financial Services Inc. He can be reached at 608-831-4282 or email@example.com.