Financial Planning Friday: Do You Need Some Cash?

March 4th, 2016 by Anchor Bay Capital's Investment Team

 

Last week I read a headline that said something to the effect, “Market Turns Negative as Investors Flee to Cash.”  In my mind, I visualized something like an old-time run on banks where lines of panicked people are waiting to withdraw all that they can out of their account.  This isn’t the actual situation, but the fear mongering of headlines can sometimes create a powerful picture.  As I thought about this headline, it occurred to me that anyone who would “flee” to cash hasn’t really created a good financial plan.

So when should you move investments to cash?  How much cash should you have?  And how does planning help you avoid unnecessary panicking?  Here are some guidelines:

Build Your Emergency Fund

Did you know that 17% of adults ages 50-64 recently dipped into their retirement savings to cover emergencies.  This is 4% higher than all age groups*.  I recommend having 6 months of net income built up and sitting in cash.  As we construct financial plans, the first investment priority that I look at is emergency savings.  This money should be readily accessible when you need it.  Everyone’s personal situation is different, so the six months is kind of a preference.  It might be helpful to look at how much risk there is to your income.  If you have a steady paycheck in a low turnover environment and there is not much risk to your cash flow, then you can get away with less cash.  If you are in a volatile industry or worried about cutbacks, it is a good idea to have more of a cushion.  Regardless, there are things that happen, that we just can’t plan for.  That is life.  When life happens, you typically need some cash. (*Source: Bankrate survey of 1,004 adults)

Plan Ahead

You shouldn’t feel the need to cash out of investments because of market circumstances or income needs.  To accomplish long term financial goals, it is important to have a well-constructed portfolio of 4 major asset categories: U.S. stocks, International stocks, Bonds and Cash for the long term. We recommend planning 2-3 years in advance to access income from your portfolio.  This means that if retirement is on the horizon, an allocation review is necessary to downsize your stock allocation and prepare for income needs.  If you are expecting to withdraw a larger lump sum for a specific goal, we recommend liquidating fixed income investments 6 months before you’ll need the funds.  The idea is to pay out your disbursements from cash.  Remember, even as you draw down your investments you want to maintain your portfolio for your goals.  We typically recommend always having some stocks for long term growth to outpace inflation.

Anything helps

What if you feel cash poor?  Start now.  Set a small goal to get one month of income in savings.  Once you are there, celebrate your success and set a new goal.  If you feel like you should be putting that savings toward debt or something else, remember that life doesn’t really wait for you.  There can always be something else that will add to the debt, but if you have some cash to pay for it, you begin to alter your spending habits.  This is where a solid financial plan starts.  Remember an old saying “mighty oaks from little acorns grow.”

If you have specific questions about how to restructure for cash or drawdown your investments, it is always good to have some guidance.  We are happy to assist you with your planning needs.