FOCUS ON YOUR #1 PRIORITY

As of this writing, the DOW average has just climbed through 22,000 on hopes of a massive government stimulus package. The stock market is acting like the crisis is over. Just a couple weeks ago investors panicked as the DOW average was falling through that same number. It is a testament to the irrational emotions that often drive investing markets that 22,000 looks a whole lot better on the way up than it did on the way down.
 
It has been surprisingly calm in our office for the past month with most calls coming from people looking to invest more at lower prices. Some of our clients are also asking when we plan to reinvest the cash we have been holding. During these volatile times, it pays to keep a couple of valuable principles in mind.
 
First, remember why it is you invest. I like to keep things simple so let me describe the process as it might look for most Americans. When you retire from the workforce you will need monthly income. You start with Social security payments and any pensions you have. If this isn’t enough (it usually isn’t) then the purpose of your retirement savings is to cover the shortfall. I will call that goal #1. It’s wonderful to have a lot of extra money to leave the kids but the most important thing is to cover any monthly income that you need. Everything else is icing.
 
So as you design a portfolio, and then in retirement as you begin to draw on it, you must always keep your #1 purpose in mind. If you do so then investment decisions, especially during difficult times, become easier. This is why we teach people to create a cash flow machine that has a likelihood of being able to weather storms. Long term markets take care of themselves, but in the short term you need income.
 
The current storm may last a while so the focus should be on #1, being able to maintain cash flow.  Hopefully you won’t have to unload depressed stocks to do so. When people ask about investing more money at these lower levels, our first response is to verify that they can satisfy #1. We want to make sure they are not investing cash that might be needed months from now to continue those monthly checks. It’s nice to have cash that allows you to take advantage of cheap stock prices, but do not use cash you might need to satisfy #1. It won’t be worth it if this thing drags out.
 
Point two, before you jump on the hot-market bandwagon, is to remember what caused this crisis. Congress is spending trillions of dollars to reduce the damage and ease the suffering, but those dollars will not solve the problem. Rising markets are tempting, but if they rise without a real solution to the initial problem, then wisdom dictates we wait until a solution begins to appear.