Readers with personal finance questions can now get expert insight through the Lebo Beat. John McGowan, financial advisor with Carson Wealth will answer select reader-submitted questions and provide professional guidance on topics such as investing, retirement, estate planning, taxes, and other financial matters. If you have a question, you would like considered for a future column, email it to info@lebobeat.com. Here is the first answer to question submitted by a Lebo Beat reader.
The stock markets currently is giving me anxiety, how can I protect my investments if the market crashes?
– Diane
Hi Diane. This is a question that hits home to many people not just right now but all of the time. The stock market can cause a significant amount of anxiety to everyone whether you are 22 and just beginning to invest or 70 and retired. It is unpredictable, and many people are dependent upon returns to fund their current or future lifestyle. With pensions no longer as common as they have been in the past, and social security not covering basic living needs, many individuals rely on their portfolios to cover living expenses in retirement.
Having a plan around market volatility is imperative. Nobody wants to delay retirement or a home purchase because of unfortunate timing with a poor performing market. Withdrawing money in a declining market without a plan is the main reason people run out of money. This risk is called The Sequence of Return risk. When you withdraw money from a portfolio that is losing value, you are forced to sell more shares to cover expenses, which ultimately leaving less capital to recover during subsequent market rebounds.
We combat volatility and reduce the sequence of returns risk by implementing a strategy that we call Bucketing. This strategy is centered around reducing risk in nearer-term portions of your portfolio that generate income. This allows you to withdraw funds in a tax-efficient manner based on your current and future income needs without disrupting your long-term growth strategy.
Bucket #1 is invested conservatively and includes funds that would cover expenses for the next five years. Bucket #2 is more moderate and includes funds for expenses in years 6-15, and bucket #3 is the most aggressive focusing on growth over the long term.
By implementing this strategy, we can prepare for volatility by pulling funds from the conservative investments when markets are not performing well. This strategy also gives us a mechanism to take profits in positive years and allows funds to “flow” downstream through the buckets always ensuring our client’s cash needs.
Bucketing provides our clients with confidence during market downturns by ensuring five years of anticipated income needs are invested conservatively and unaffected by negative market fluctuations.
If you would like to have your question answered in a future edition of Lebo Financial Answers, email Pittsburgh@carsonwealth.com.
Questions answered in Lebo Financial Answers are provided by John McGowan, CFA MBA at Carson Wealth.
