Retired? Avoid the Cardinal Sin of Investing

Designing an investment portfolio can be a complex process at any age. It requires consideration of various variables such as risk tolerance, time horizon, and financial goals; however, there is one rule that always holds true for investors: 

**Rule** Never put yourself in a position where you MUST sell assets when they are down to meet a cash flow need. 

Over the past few weeks, we saw this dynamic play out with the downfall of several US regional banks, and the concept also applies at the personal level. However, you can avoid this painful mistake with prudent budgeting, asset allocation, and internal asset class management!  See below for details:

Secure Short-Term Cash Need

One of the most important steps in avoiding a forced sale of assets is having a sufficient amount of safe and liquid assets to meet a cash flow need.  This is particularly important to retirees as they rely on their portfolio to supplement income from pensions, social security, etc., to maintain their lifestyle. Recommendation: At least six months of liquid cash/cash equivalents or short-term debt instruments, with little to no risk built into your portfolio’s bond/fixed income portion.  While this approach sacrifices some upside potential offered by riskier bond instruments, there is an unquantifiable value in knowing where your cash flow is coming from in the short run. 

Rebalance/Maintain Asset Class Diversification

Establishing a well-thought-out and disciplined rebalancing approach is key when designing and implementing an investment strategy.  Rebalancing is a discipline that attempts to remove the emotion from the buy/sell dynamic and helps investors maintain the appropriate mix of stocks, bonds, and cash.  The act of rebalancing can be based on a pre-determined schedule or be more event driven.  Regardless of your criteria for rebalancing, the most important thing is to execute it. Recommendation: If you are in retirement, and have an ongoing cash need from your portfolio, make cash raises a priority in each rebalance.

Ensure Diversification within Asset Classes

Lastly, in addition to rebalancing and asset class diversification, you must also maintain internal asset class diversification.  For example, within the stock portion of your portfolio have exposure to as many sectors of the economy as possible as sectors tend to respond differently in various market environments.  On the bond side, ensure you have a mix of short-duration bonds (Money lent for short periods) and longer-duration bonds (Money lent for longer periods).  Additionally, ensure you maintain a bias towards lending money to borrowers with high credit quality, such as the US government, or instruments backed up by the full faith and credit of the US government.  While you may want to maintain some exposure to borrow with a lesser credit quality, it should be limited, particularly if you have a cash flow need from your portfolio. Recommendation: With short-term interest rates currently at multi-year highs, a larger allocation to instruments such as money market mutual funds should be considered as they offer respectable yields without the loss of liquidity. 

For weekly insights, follow The Welch Group every Tuesday morning on WBRC Fox 6 for the Money Tuesday segment. 

certified financial planner Marshall Clay wears a gray jacket and white shirt while posing for professional photo in office

Marshall Clay CFP, J.D., is a Partner and Senior Advisor at The Welch Group, LLC, specializing in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™.  In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by The Welch Group, LLC –(“Welch“), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Welch. Please remember that if you are a Welch client, it remains your responsibility to advise Welch, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Welch is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of Welch‘s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.welchgroup.com. Please Note: Welch does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Welch‘s website or blog or incorporated herein, and takes no responsibility.