Everyone has a plan until they get punched in the mouth

–Mike Tyson

As I write this the world is in lock-down due to the spread of a global virus. I write mostly about financial issues but try to consistently keep the perspective that your time is really your most valuable resource, and your continued health is what enables you to make the most of that time. So, remember that if you and your loved ones are relatively safe from this, consider yourself among the fortunate. My friends and family who are doctors and nurses see it up close and personal, and I don’t know any of them who have their stock portfolio as one of their top 10 worries. Just keep that perspective.

With that as an important backdrop, looking at this as merely a financial impact can be jarring. I’ve talked about this in prior posts, the occasional, even significant decline in the stock market is completely expected, and is actually a positive. One of the other positive things to result from a downturn is it gets you to measure your real response to a crisis. I can ask myself, what would I do right now if this were happening and I was already retired with my 50/50 stock/bond portfolio? If I’m being honest with myself, I’d be freaking out. This is extremely valuable insight into my psyche, and allows me to avoid those freak-out moments as an old man, at least when it comes to money.

I still think the 50/50 portfolio can work for many people, but recall my analysis for that example showed there was a 10% chance of outliving your money using the 4% rule for withdrawals. As risk-adverse as I am, I realize for me, that’s too big of a chance. I also realized that to mitigate the impact of this kind of downturn in the future, I’d want to have a plan that required no stock sales, so as things dropped it wouldn’t really cause any short term panic selling, which as a stock investor is what you have to avoid.

Here’s the difficulty. At today’s interest rates and stock dividend yields, you can’t count on 4% yields. You can’t really even count on 3%. To get to 4% in today’s environment you have to be reliant on some gains of your investments, or be willing to dip into principal–which can be a vicious cycle of reducing your investment assets, which leads to less yield, which causes you to withdraw more principal. I’ve adjusted my plan to try to address this.

In earlier posts, I talked about two buckets of funds, one to sustain your life from age 59.5 using designated retirement funds, and another to get you from whenever you stop working to age 59.5, your “bridge” to retirement. I’m still a believer in the long term value of stocks, so still recommend my asset allocation for those long term assets. I may rethink the retirement age allocation, but I’m sticking with it for now. For the shorter term assets, part of my solution is an asset I’ve tried to avoid up until now, rental real estate. I’ve avoided this not because I think it’s a bad investment, but because unlike other assets classes, it requires work, so to call it passive income is a stretch. It’s a little bit investment, a little bit part time job. But I’ve come to realize this is my favorite income-producing risk-adjusted asset right now. I’ll have a follow up post on this, but I’ve dipped my toe in, I can’t stay out any longer.

For shorter term, bridge assets, I recommend the following. Instead of my prior approach which was to determine the earliest possible date you can retire, take a little more conservative approach and lay out your intended work plan. How long do you believe you’ll work full time? Part time? With that plan, you can estimate each year’s income and with your forward-looking budget you can estimate expenses. You can do this for each year going out to age 59.5, I even try to estimate when I will make major purchases, like cars.

With your short term assets you can also estimate both yield (income produced) of those assets and growth of those assets. The following is a reasonable example, you may want to adjust these based on interest rates, market conditions, etc. Note the yield and growth values for Real Estate vary considerably depending on how much you initially invest. If you buy the property outright, more yield, less growth. If you finance a great deal of it, less yield, more growth.

Asset	Yield	Growth
Stocks	2%	5%
Bonds	3%	0%
Cash	2%	0%
Real Estate	3%	3%

For each year, assume the yield of your investments can be used to supplement your income and add that to any money you expect to earn working. If your expenses exceeds your income (from investments and salary) draw money only from cash and bonds (the ratio of this draw can be varied but one approach is 50/50). If your income exceeds expenses, put the extra into cash and bonds. A reasonable place to start is equal 25% allocation in each of the asset classes above then project out your balances for each of these assets classes for every year until you are 59.5 or whenever is your long-term retirement age. Do you finish with positive cash and bond balances? If yes, then you have a plan to get to 59.5 without needing to sell any stocks or real estate holdings, so when the market tanks again (remember these downturns are nearly guaranteed, the difficulty is predicting when they will happen, not if they will happen), you are positioned to continue to live your lifestyle pretty much as planned. The idea is trying to set up a condition where a down stock market or down real estate market has no significant bearing on your life.

Why keep any money in stocks at all? Well, you could argue that the risk isn’t worth it, but I still believe that you should have exposure to the growth power of stocks. Over the long term this should still finish as your most productive asset.

What if that plan doesn’t work? What if it shows you run out of cash? Make adjustments. Maybe you have too much money in stocks or real estate. Maybe your date to quit working is too early and needs to be pushed back. Keep adjusting until you have a plan that shows positive numbers for all your assets.

Finally, remember that history says fortunes are made during market downturns. Warren Buffett’s famous financial advice to be “fearful when others are greedy, and be greedy when others are fearful” is difficult to execute. However, hopefully this provides you the confidence that investing in stocks for your long term assets is still a good idea, if buying prior to the crash made sense, certainly buying after the crash makes even more sense. These purchases do not care about the price of stocks tomorrow or next week or next year. These purchases are made looking out 10-20-30 years, where if history is a guide, stocks will be a smart purchase.