The crisis stemming from the SARS-CoV-2 pandemic has thrown our society into an unprecedented state of fear and uncertainty. In a relatively short span of time, this invisible enemy has turned our entire world upside-down, disrupting every aspect of life as we know it. School is different. Work is different. Business is different. It may feel like the financial world is collapsing. Your inclination may be to pull all your investments from the stock market, put everything into cash and simply hibernate until things begin to normalize.
But a knee-jerk, fear-based reaction will only hurt you in the long run. Having the courage to hold your ground will generally work to your advantage, so long as you plan carefully and avoid making panic-fueled decisions. If your thought process is haphazard or reactionary, the odds of success will dwindle quickly.
With all that in mind, how do you formulate a plan that works? For starters, you need as much information as you can gather. Knowledge is key, as well as a thorough understanding of the circumstances involved. For example, the banking crisis of 2008 and the World Trade Center bombings of 2000 are completely different catastrophes than the one brought about by Covid-19. Every crisis has its own unique set of short-term and long-term ramifications, although the basic strategies for weathering them are the same.
Core & Explore
This strategy works because the money you will need to see you through retirement (your “Core Money”) is never at risk. It is completely safe from market loss, so a crisis like the one we are experiencing now cannot decimate your nest egg. Any funds outside your Core Money can be used to explore investment opportunities. This “Explore” fund is money you can afford to lose if you make poor investment decisions or if markets decline due to reasons beyond your control.
If you have experienced loss of your Core Money due to the pandemic, what is your next move? As life normalizes do you double down and put 100% of your money in the stock market to try to recoup your loss quickly? Absolutely not! A slow and steady approach is the best method for scratching your way back. And once you have regained your financial footing make sure that, going forward, your Core Money stays safe from risk.
Bucketing is a strategy that we have been employing for decades, and it goes hand in hand with the Core & Explore philosophy. It is a method of distributing your assets across three “buckets” in accordance with your age, so that your entire financial plan is balanced. Each bucket is a different color (yellow, red, or green) and each has its own specific function and level of risk.
The Yellow Bucket contains the investments that will carry you through emergencies such as an unexpected home or auto repair… or a financial crisis such as the Covid-19 pandemic. This safety net fund can be accessed at any time and is not vulnerable to market loss. This money earns low returns, but its purpose is to preserve your money, not necessarily to grow it. During the current crisis, a lot of folks realized just how important it is to have 3-6 months of income set aside to cover living expenses. Many realized too late that their yellow bucket was inadequate, and they are now scrambling to pay their bills and are racking up credit card debt.
The Green Bucket is made up of investments offering good growth potential with no risk of market loss. You can think of this money as a “personal pension” that you will use to pay your bills one you retire. The amount of money to keep in your Green Bucket can be determined by utilizing the “rule of 100.” This rule states that if you take you age and subtract it from 100, the resulting number is the percent of assets you should have in your Green Bucket.
The Red Bucket contains everything else you have in your financial portfolio, notably your long-term investments, such as stocks. This is the Explore portion of your assets, money that is at risk for loss as you invest it with the goal of making a higher return. As you near retirement, you will want to allocate less to this bucket, because if you experience a large loss, you will not have the appropriate amount of time needed to let your investment grow again.
If you find that you cannot afford to maintain the same standard of living you have held until now, the simple truth is that you will need to cut back on your expenses. Get out the scalpel and do a line by line trimming of the fat in your budget. If you do not have a budget already, make one now. It is amazing how little we can live on if we have no other option. Now is the perfect time to look at your monthly expenses and differentiate between your “needs” and “wants.”
Ask a Fiduciary
It is always a great idea to seek outside counsel from trained and licensed advisors, like our team at Capital Financial. We are a proud fiduciary firm. What that means to you is that we are legally and ethically bound to do what is best for you. A proper fiduciary advisor first listens, asks questions, repeats what they hear, and then puts a plan together for you that will be 100% in your best interest.
A fiduciary will never advise you to follow a path that is not beneficial for you. Some firms simply do not have the freedom to offer individuals the proper tools to achieve their clients’ goals, so they employ the “get a bigger hammer” approach. They may force strategies into individual financial scenarios that are, at best, not optimal for assuring your financial wellness. Always ask whether your advisor is a fiduciary.
At this point, some folks are thinking “as soon as this blows over, I’m going to meet with an advisor and initiate all these great strategies.” The truth is, we have no idea what the future holds. Things could get better, but they could also get much worse. There is no better time than right now to establish a plan to protect your assets, so that you can feel confident about your financial wellness, regardless of what tomorrow brings.