ASK NOT WHAT the markets can do for you. Ask what you can do for your portfolio.
After 15 turbulent months for stocks, many folks feel they’re at the mercy of the financial markets. But in truth, we’re far from powerless. We may not be able to control the direction of share prices. But here are seven crucial financial levers over which we have a lot of control:
1. We can figure out how much cash we’ll need from our portfolio over the next five years, and then shift this sum into short-term bonds and cash investments. That way, we know we’re in great shape for the next five years, no matter how crazy the markets get.
2. We can increase our earned income, reducing our reliance on our portfolio. The bigger our paycheck, the less need we’ll have for investment gains, which is why even retirees may want to work part-time.
3. We can cut our spending, which also reduces our need to take money from our portfolio. Reducing spending is one of the great financial levers—and yet it’s given scant attention. My advice: Keep your fixed costs low—we’re talking expenses like mortgage or rent, car payments and insurance premiums—so you can easily trim your spending if the markets go against you.
4. We can keep more of whatever the market delivers, by holding down our investment costs, making full use of retirement accounts and holding tax-efficient investments in our taxable account.
5. We can take advantage of lower stock prices by saving more and by rebalancing our portfolio.
6. We can reduce our exposure to the markets by exploiting one of our great financial advantages—our eventual mortality. The federal government will pay us handsomely to delay Social Security, while insurers offer hefty income to retirees who purchase immediate-fixed annuities. We might live off our savings in our early retirement years, while delaying Social Security to age 66 or even age 70. If we want additional guaranteed lifetime income, we might consider an income annuity.
7. We can choose to do nothing. Market turmoil often scares folks into action. But keeping our trading to a minimum is often the smarter strategy.