cash management

Up And Down Really Means Up And Down

© Can Stock Photo / webking

As long term investors we talk a lot about the need to weather short-term volatility in pursuit of long-term results. Our notion is that volatility is not risk, but an inherent feature of investing.

As years go by, many think of the market as having good years and bad years. This is based on the outcome for calendar years. The astonishing thing is how much movement there is during the course of the typical year.

“At least one year in four, roughly, the market declines.” We’ve said that about a billion times, to reiterate that our accounts are likely to also have good years and bad years, if one judges on annual returns. The object is to make a decent return over the whole course of the economic cycle, year by year and decade by decade.

But in those other three years out of four, the market also experiences declines during the course of the year. In an average year you may see a decline of 10 to 15% at some point during the year.

Our object is to leave long term money to work through the ups and downs, without selling out at a bad time. Three things help us do that:

1. A sense that everything will work out eventually, a mindset of optimism.

2. Awareness that downturns tend to be temporary, ultimately yielding to long term growth in the economy.

3. Knowing where our needed cash will come from, based on a sound cash flow plan.

Bottom line, even years that end up well can give us a rough ride. Knowing this can make it easier to deal with.

Clients, if you would like to talk about this or anything else, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Stock investing involves risk including loss of principal.

All performance referenced is historical and is no guarantee of future results.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

 

Money in the Bank

© Can Stock Photo Inc. / turk12

We have learned over the years that money in the bank is useful and worthwhile for a variety of reasons. It helps us deal with emergencies and take advantage of opportunities. The confidence that comes from having that certain amount safe and sound is perhaps the best thing about it.

With the right amount of money in the bank, people may have more tolerance to the ups and downs of longer-term investments. With today’s low returns on safe, liquid investments, for some living with volatility is the only way to have a chance at decent returns over time. (We are using ‘money in the bank’ as a term to include a variety of conservative investments likely to maintain value.)

As with so many things, there is a gap between how people usually think of their money and how the financial industry talks about it. For example, when you think about the balance you need to have in order to sleep comfortably, you think in terms of a dollar amount. It might be $2,000 or $200,000 or some other number—a matter of circumstances and personal preference.

But the financial industry talks about it in terms of percentages. For example, a blend of 80% stocks and 20% conservative, or 60/40, or 40/60. We see things a little differently. Like Warren Buffett, we believe a temporary dip is not a loss, we are optimistic about the long term, and we know that tolerating volatility is crucial to successful investing. But you still need to sleep comfortably at night, and you still need those advantages that come from having money in the bank.

Our proposal: we will be working with you in the weeks and months ahead to sort out how much if any of the funds entrusted to us should be devoted to capital preservation first. We won’t be talking about percentages like 80/20 or 60/40; we’ll be looking to help you ascertain that dollar amount in conservative investments that strive to leave you feeling comfortable.

This is slightly harder than it sounds, since the trade-off for more stability is less growth potential over time. But we are here to work you through these issues. Write or call if you would like to discuss your situation in detail, or have other questions about this.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss.

Stock investing involves risk including loss of principal.

There is no assurance that these techniques are suitable for all investors or will yield positive outcomes.