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What Do you Do When the Shit Hits the Fan?

Summary:
Full blown panic has set in. And no one knows when it will end. The uncertainty is like a daily replay of the worst moments of the financial crisis. Except on warp speed. A global pandemic is the type of event that you expect to see in movies, not in reality. And there’s no precedent for how to navigate such an acute and fast economic/market downturn. So, we’re in uncharted territory. What can we do now? Match Your Liabilities Good asset management is about asset liability mismatch. What I mean by this is that we have short-term liabilities (rent, mortgage, bills, etc) that require liquid assets (cash, short-term bonds) and long-term liabilities (retirement, college payments, etc) that require less liquid long-term assets (stocks, real estate, long bonds). When we allocate assets the

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Full blown panic has set in. And no one knows when it will end. The uncertainty is like a daily replay of the worst moments of the financial crisis. Except on warp speed. A global pandemic is the type of event that you expect to see in movies, not in reality. And there’s no precedent for how to navigate such an acute and fast economic/market downturn. So, we’re in uncharted territory. What can we do now?

Match Your Liabilities

Good asset management is about asset liability mismatch. What I mean by this is that we have short-term liabilities (rent, mortgage, bills, etc) that require liquid assets (cash, short-term bonds) and long-term liabilities (retirement, college payments, etc) that require less liquid long-term assets (stocks, real estate, long bonds). When we allocate assets the goal is to maintain enough liquidity so you can meet your short-term liabilities while also having the confidence that your long-term assets will grow, outpace inflation and ensure you have assets to meet those long-term liabilities when they become short-term liabilities.

Many people get caught up in the “beat the market” game or excessively risky asset allocations that expose them to liquidity risk. During periods like the current downturn these investors learn their risk profile and the actual need for liquidity. As I’ve noted before, the worst time to learn your risk profile is during a financial panic.

That said, it isn’t too late to start planning. If you don’t have liquidity you can still create some. There’s nothing wrong with selling some stocks in a period of great uncertainty if it matches your liability needs. There’s nothing wrong with postponing retirement contributions. But don’t overreact. You should never treat your portfolio like an “all in” or “all out” strategy. There’s a place for stocks in everyone’s portfolio because everyone has long-term liabilities. But there’s also a place for short-term assets in everyone’s portfolio because everyone has short-term liabilities.

Tighten up Your Liabilities

We can’t control what the stock market does. But we can control what our liabilities look like. During periods of uncertainty we have to accept the reality that our lives are going to change. Controlling your liabilities will increase certainty in your life and help you become more comfortable with whatever your portfolio is doing.

Know Your History

People panic because, quite frankly, they’re impatient and misallocated. The historical fact is that the economy is going to grow in the future. Even during the worst downturns we still rebuild, innovate, produce, etc. It could take years and even decades to crawl out of deep economic holes, but we always rebuild. Always. And as we do the markets will recover, people will become greedy again and the cycle goes on.

As I noted before, you need patient assets and impatient assets. This is the only way to solve the asset/liability mismatch problem and maintain your cool when everyone else is panicking.

Take Care of Yourselves and Others

Economic downturns are a great time to hunker down and get your life in order. We need to take care of ourselves and those around us. These kinds of events are never easy, but they’re also opportunities. But most importantly, remember that while money makes our lives easier, it’s not the most important thing in the world. Taking care of one another will help ease some of the short-term financial strain and remind you what matters most in life.

I hope you’re all hanging in there and taking good care of yourselves. If there’s anything I can do please don’t hesitate to reach out.

Cullen Roche
Former mail delivery boy turned multi-asset investment manager, author, Ironman & chicken farmer. Probably should have stayed with mail delivery....

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