Many years ago my wife and I set a goal to someday become independent of the financial
markets. We’ve achieved that goal. We did it by saving, staying out of debt, and avoiding
big losses in the market.
What’s your investing goal? Is it saving for retirement, amassing great wealth, or generating
current income? Perhaps building a cushion for future medical expenses or providing for your
children’s education? Maybe some or all of these? Something else?
Whatever your investing goal, it’s likely you have some sort of strategy worked out to meet
your goal. Many of you here have portolios focused on growth stocks. Others – probably not on
this board – are focused on dividend growth. Some people use a quant approach.
Whatever your strategy, I bet now and then some of you think about what could derail that
strategy, and therefore put your investing goals in jeopardy. Perhaps you’ve thought of ways
to test your portfoilio’s ability to meet a crisis – call it a stress test.
Here’s one way to approach that.
Think of your largest investment in a business. You might be invested in this business across
several of your portfolios. Now suddenly – without you being able to anticipate it – this
business goes kaput. It dies, or becomes severely crippled with no hope of recovery. You suffer
a PERMANENT loss of your investment in that business.
How would this affect your investing goals?
- No impact – the probability of this happening is so small that it can be disregarded.
- No impact – my other investments would enable me to meet my goals.
- Some impact – it would take some time but eventually I would recover to meet my goals.
- Disaster – I wouldn’t be able to meet my goals.
- Other – please explain.
I chose other. A few questions. When you say independent of the financial markets, what do you mean? One could read that as not needing the financial markets because I have a job that pays all my expenses and then some. Do you mean having enough saved to last one’s lifetime without any growth of that capital?
On to your question. I run a portfolio of 14-20 stocks. My largest position is currently AYX at just about 9% of my portfolio. If that disappeared tomorrow that would set my wife and I back a little less than a year of savings, or the rest of our portfolio appreciating about 10%. We significantly under live our income (save about 65%). We would be able to live off of our investments now if we moved to a different area. To stay in our current very high cost of living area (the bay area) we will need to another couple years of savings and investment gains.
Good thought experiment.
Do you mean having enough saved to last one’s lifetime without any growth of that capital?
Yes. Including contingencies like tier 1 drugs, long term care, and other nuisances.
We significantly under live our income (save about 65%). We would be able to live off of our
investments now if we moved to a different area. To stay in our current very high cost of living area
(the bay area) we will need to another couple years of savings and investment gains.
I’ve always been impressed with your approach to investing. I’m rooting for you!
To stay in our current very high cost of living area that gives you a back up plan (move) not available to most.
Most of us deal with this situation by diversification strategies.
I can understand the difficulty when a particularly large asset is involved which may not be easy to diversify around. A business. A major real estate investment that is difficult to divide.
But if you think about it, most of the time diversification is possible. The hard part is giving up the upside if the investment is doing well.
Consider the risks. Estimate the impact of various modes of collapse or failure and then plan accordingly.
Who knows. Perhaps one day we will all wind up living on Social Security. For me I think that would require a major catastrophe.