Financial Planning for Cash
By Dan Ahl, AAMS™
Associate Portfolio Manager
When is a dollar worth more than a dollar? Understanding this concept has the potential to make or break your retirement plan. For most of us the bulk of our retirement portfolios has been built up in various stocks, bonds, and mutual funds that we accumulated throughout our working years. These are the assets that help us grow our money to meet and beat inflation in the long-term. However, at times it is in fact cash that turns out to be the one that saves the day.
To answer my opening question let’s look at an all too common example that we see regularly. Let’s pretend that you are in retirement and need money, but the stock market is down 25%. You have a choice between spending $1 from a savings account vs. selling an investment that is worth 75 cents to the dollar that you paid for it. You might think the choice would be easy. Yet the psychology of investing makes this choice harder than it should be.
Our instinct for self-preservation fears that our investment may lose more money if we don’t “get it out”. However, by deciding to sell the investment we have now made this loss permanent.
If, rather, we choose to spend the dollar from savings not only are we preventing ourselves from realizing the loss on the investment, but we are buying ourselves the most valuable thing of all, time. As short-term market swings come and go utilizing our cash reserves can allow the market time to recover and give you the option to sell your investments later for a profit.
If you are a client, you may know that this is a strategy we employ for you already. By strategically building cash reserves at times when the market is up, we have been able to meet many our clients’ needs without selling investments when markets are down.