A critical art of our process is making sure portfolios are structured and maintained in a manner that allows our clients to feel comfortable during market declines. Studies have proven that individual investors tend to sell “low” and buy “high” due to emotional factors, so managing these tendencies is important as we assist clients. We have found that thoughtful portfolio construction coupled with education allows clients to stay disciplined during volatile times.
At the end of the day, an investment strategy will be successful if it delivers the cash flow and/or growth desired by the client during its time horizon. When structuring portfolios, we consider the risk and return desires of our clients as well as the ability of their portfolios to meet their cash flow needs. For our clients who are no longer in the wealth building phase of their life, we typically work with them to identify an appropriate approach to meet their cash flow needs based on the amount of distributions they anticipate needing from their portfolios each year, the annual income generated by their portfolios, as well as the amount of low risk assets that are contained in their portfolios. We explain that the portfolio income and low risk assets coupled with any outside income create a “runway” so he/she can understand the length of time they can survive a market downturn without having to sell any risky assets. We have found that by structuring portfolios with sufficiently long “runways”, our clients feel comfortable staying invested according to strategy in even the most volatile market periods.
For clients with substantial assets or modest portfolio withdrawal needs, keeping a certain dollar amount of their assets in a “vault” can be a good approach to allowing them to feel comfortable sticking with their investment strategies when markets decline. The “vault” is comprised of a specific amount of extremely safe assets and/or other non-correlated liquid securities, such as gold, that the client wants to maintain as a baseline level of assets in case of an “Armageddon” event. While this “vault” amount might be an arbitrary number, it is often equal to the amount needed to fund future living expenses or the specific amount the client desires to pass on to beneficiaries and/or to charity. One of the advantages of this “vault” approach, is that it can assist clients in better defining the ultimate objectives for their assets and ensuring they will meet those objectives in absolute dollar terms.