Many discussions we are having with investors are focused on short term movements in the stock market. The focus should be on cash flow requirements. By knowing your spending rate, how much cash flow is being generated, and what alternate sources of cash are available to you means you can answer the big question. Do I have enough cash? When we hear these questions it actually sounds a lot like “am I going to be alright?”
“Cash is king” is a term used many times over the years. This is not always true. Cash itself pays very little interest these days. Holding cash in a bank account won’t pay for very much of anything. True, holding cash means that you have avoided the downside of the stock market but it doesn’t mean that it is growing and contributing.
Broadly diversified portfolios have not gone down at the same speed as the stock market because they are not the market. However, the question of income is a fundamental question that should be asked. This cash flow question comes to us in three ways:
- “Do I have enough cash to retire?”
- “Do I have enough money to fund my current retirement?”
- “Do I have enough money to fund my goals?”
I would suggest that we alter it to say “cash-flow is king.” To fund all three of the previous questions you simply need to know and understand what your cash flow needs are:
- How much cash do I currently withdraw from my portfolio on an annual basis?
- How much am I currently receiving in interest and dividend payments annually?
- How much of my portfolio do I hold in bonds?
Knowing your spending rate is the first place to start. What kind of budgeting have you implemented? Are there discretionary spending sources that you could skip if needed to? There may be a need to shore up finances during these times, making sure that you have enough money coming in to pay for those trips to Costco or Safeway. Good luck finding luxury items like toilet paper, baking powder and canned soup.
Knowing how much cash is coming in and from what sources. You have multiple sources of cash flow available to you simply by being invested in a well-diversified portfolio. Bonds are paying interest semi-annually into your portfolio. Many stocks within your equity funds are paying dividends quarterly into your portfolio. These sources of income don’t include those who have pension plans or those who are collecting CPP or OAS. Financial planners call this formula ‘layers of income.’
Knowing how much you have invested in bonds to pull from if needed. When the stock market contracts, corrects, crashes, whatever verb you choose to use. It means that if you sell from a stock position you are ensuring that you will not recover that amount. Instead of doing that it would be best to sell from bond position as those markets don’t move at the same speed or in the same direction. During the 2009 credit crisis the bond market was up when the stock market was way down. Investors who had cash requirements that exceeded their sources of income could still sell some bonds to pay for day to day living expenses.
Cash flow comes from many sources. It can even come from the sale of securities. When stock positions go down in value it can cause panic. Monthly account statements reflect a value on a certain date for items that are constantly changing in price. Knowing your income sources or potential income sources can help relieve some of that stress.
Regards,
The CM Group