So Dad, How Can I Make Some Sense Today? – Part 4 of 5 (or so)
Updated: Jan 17, 2021
Ok, the world is not really operating according to plan, so with a calmer mindset, and after assessing the situation, it’s time to to talk specifics. I realize many of you are feeling like you’re still laying on the ground flattened out. The reality is, if you’re reading this, you’re still alive. You’re probably roughed up a bit, but let’s see how hurt you really are.
“What am I supposed to do? I don’t want to panic, but should I sell, buy or what?” are still the questions of the day. Here’s what I do: my first instinct is to look at my cash situation. I am a big believer in cash and cash flow. Cash flow is cash coming into the household and going out of it. For many, (my son, Wesley, comes to mind) our cash flows have been disrupted greatly. Wesley works part-time as a server in a restaurant industry. A large chunk of his income has been stopped – sound familiar to anyone?
Because we don’t know how long this disruption will last, we may have to turn to using some of our savings or investments to support or supplement our lives. Of course, the first adjustment might be to curb some of our spending, too. But as we do so, we should consider our cash reserves. Let’s be clear, the most important aspect of savings is that the cash is immediately available and safe. Typically, the consensus within the financial industry is that people should maintain enough savings to cover three months of expenses (at least). Right now, in these circumstances with all this uncertainty, I want more cash reserves.
It’s not that I think the virus will last more than three months. It’s because it may take longer for the world to return to a more “normal” state. So, how does this relate to the “What am I supposed to do?” question? If I don’t have the cash reserves fully stocked, I’m looking to raise cash – not to preserve my wealth – but to have the reserves necessary to support my life. This is a good starting point of conversation between you and your advisor(s). How much cash should you have available?
If the cash reserves are adequate, I turn to two bits of the wisdom my dad shared long ago, and one of my own. The first bit of wisdom dad shared was “when you don’t know what to do, wait – things will become clearer”. Personally, I tend to want to wait on things – making calm, logical decisions instead of getting lost in emotions – whether the emotion is fear and self-preservation, or perhaps greed sneaking in. And if the cash reserves are large enough, there’s more time before we must do anything. If six months later we think the conditions and challenges will persist, we can start looking to increase the reserves again. But waiting and using logic steers us into the second bit of wisdom I’ve learned. I try to focus on how I want to be wrong.
In most any action there is a probability of being wrong, though sometimes the probability is so slight it’s almost un-noticeable. (Flipping a light switch doesn’t have a high probability of a problem, unless you’re standing in a puddle.) But other times, the probability is high that a mistake could occur (uhm, puddle!). It’s at that time I’m concerned about being wrong and making a big mistake. Selling or buying on emotion – when I’m not very sure of things – just pushes the probabilities of making mistakes higher. Sure, I could be missing an opportunity – or making an even bigger mistake. Could the mistake be that what I sold turns up quickly and starts rising, or what I bought continues to go down? By waiting until things are clearer, I try to reduce the probability of being wrong. And this insight leads back into dad’s other nugget of wisdom. His second point was “try to go with what you know, not with what you hope.”
Through assessment, I know how much cash I have and how the cash flow is being impacted. I know what bills are coming up, and which ones have a higher probability of occurring – particularly if the problems of today persist or possibly get worse. This is where I put my focus, instead of pondering the things I hope (What if the markets go higher? What if they go lower?) Those questions will be dealt with when I know more, and the higher cash position provides more time to consider them. It’ll also help me focus on whether I’m gambling or investing. That’ll be the subject of our next chat.
Side note: Chapter 3 “So Dad, How Can I Make Dollars & Sense?” goes into a deeper discussion of probabilities and these bits of wisdom. Click here for more information on purchasing a copy.