SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Financial Planning Lessons From the Pandemic


The first quarter of this year will end up being one of the most volatile quarters of our investing lives. Many lessons can be learned. Perhaps none are more important than the basic principle of maintaining sufficient cash liquidity in the form of an “emergency fund” during both our working and retirement years.

The global pandemic is causing many people to lose their jobs, or at least experience a short-term reduction in income. Government programs are stepping in to help, but only as a small safety net. The wisdom of maintaining an emergency fund of at least 3-6 month’s worth of living expenses in very safe cash equivalents has never been more apparent than now. This emergency fund is there for these times, where income may be temporarily suspended or reduced, and equity fund values are well below their highs. This is often the case during periods of economic stress where the times when you need to dip into savings coincide with bear markets.

 

The month of March also reminded us how low risk investments are not the same as no risk investments with many short-term fixed income ETF’s experiencing large declines of 10% or more. With regard to your emergency fund, it’s best to stick with FDIC insured high yield savings accounts and money market mutual funds and ETF’s that limit their holdings to short term government and other high-quality securities. This lowers expected returns, but the point of an emergency fund is to act more like insurance than an investment. Buying various forms of insurance also lowers returns every day you don’t file a claim, but the thought of not having insurance during an unexpected time of need is unimaginable.

 

For those in retirement who are living off a combination of Social Security and portfolio income, it’s wise to maintain a larger emergency fund of around 5 year’s worth of living expenses that are not covered by guaranteed income sources like Social Security. Each situation will vary, but this is a good starting point and is based on the historical analysis of how long well diversified balanced portfolios have remained in drawdowns. An example might help:

  • 66 year old retired couple
  • $1,000,000 in total savings
  • $50,000 in annual Social Security income
  • $90,000 in desired inflation adjusted total annual income

The example above highlights how there is a $40,000 annual income shortfall that will need to be covered by the $1,000,000 in retirement savings. With current yields on riskless Treasury Bills around 0.10%, it’s clear that keeping the entire nest egg in cash equivalents will not work long-term if either one of them were to live to age 100.

 

At the other extreme, investing the entire $1,000,000 balance in a diversified equity portfolio and withdrawing $40,000 per year from a combination of dividends and selling shares would work well in most historical periods, but carries uncomfortable volatility and the risk of irrecoverable losses if the first several years include a large decline with more of an “L shaped” recovery than we’ve seen historically. Money spent cannot recover. So a balanced approach is sensible, for example:

 

$40,000 per year * 7 years = $280,000. Assume that these assets are held in a combination of cash and intermediate term US Treasury funds. The remaining balance of $720,000 is invested in a globally diversified equity portfolio. Together, this is a “72/28” balanced portfolio of stocks, bonds, and cash. With this mix of assets, an investor is ready for good markets and bad. During down years the withdrawals can be funded primarily or entirely by cash and bonds as part of the rebalancing process. During up years, rebalancing from stocks as they get overweight back into cash and bonds to maintain the 72/28 mix further increases the years of living expenses in low risk assets.

 

Conclusion

A global pandemic naturally makes us all reflect on our lives and our finances. The key, as always, is to have a well thought out plan that anticipates economic stress and equity bear markets as it’s near certainty that they will continue to occur in the future. This plan should balance risk with reward, according to your personal needs and tolerance for uncertainty.  Any plan is better than no plan, as those without a plan are the ones most likely to cause irrecoverable damage to their finances when stress and fear are at their highest.

 

Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios.

 

Edited by Jesse

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • The problem of Option Math

    Option traders may be divided into two categories. First are those relying on instinct or casual observation. This group tends to speculate on directional movement, future volatility, value, and on potential profitability of trades. The second group is involved deeply with math of trading and depends on what is perceived as certainty or near certainty.

    By Michael C. Thomsett,

    • 0 comments
    • 195 views
  • Put/Call Parity: Two Definitions

    Traders hear the term put/call parity a lot, but what does it mean? There are two definitions and they are vastly different from one another. The first definition involves the net credit/debit for any combination trade, with trading costs are considered. The second definition takes assumed interest rates and present value into mind.

    By Michael C. Thomsett,

    • 0 comments
    • 213 views
  • Do Options Affect Stock Prices?

    It is widely acknowledged that the price of the underlying directly impacts the premium of the option. Therefore, options are termed derivatives. Their current value is directly derived from movement of the underlying price. Is the opposite also true? Does movement of the option value affect the underlying price?

    By Michael C. Thomsett,

    • 0 comments
    • 406 views
  • Portfolio Withdrawal Strategies

    This article will discuss three ways to take systematic withdrawals from your investment portfolio that would be expected to last 30 years, which is a typical time period a 65-year couple might need to plan for in retirement.

    By Jesse,

    • 0 comments
    • 304 views
  • Pricing Models and Volatility Problems

    Most traders are aware of the volatility-related problem with the best-known option pricing model, Black-Scholes. The assumption under this model is that volatility remains constant over the entire remaining life of the option.

    By Michael C. Thomsett,

    • 0 comments
    • 485 views
  • Option Arbitrage Risks

    Options traders dealing in arbitrage might not appreciate the forms of risk they face. The typical arbitrage position is found in synthetic long or short stock. In these positions, the combined options act exactly like the underlying. This creates the arbitrage.  

    By Michael C. Thomsett,

    • 0 comments
    • 684 views
  • Why Haven't You Started Investing Yet?

    You are probably aware that investment opportunities are great for building wealth. Whether you opt for stocks and shares, precious metals, forex trading, or something else besides, you could afford yourself financial freedom. But if you haven't dipped your toes into the world of investing yet, we have to ask ourselves why.

    By Kim,

    • 0 comments
    • 496 views
  • Historical Drawdowns for Global Equity Portfolios

    Globally diversified equity portfolios typically hold thousands of stocks across dozens of countries. This degree of diversification minimizes the risk of a single company, country, or sector. Because of this diversification, investors should be cautious about confusing temporary declines with permanent loss of capital like with single stocks.

    By Jesse,

    • 0 comments
    • 481 views
  • Types of Volatility

    Are most options traders aware of five different types of volatility? Probably not. Most only deal with two types, historical and implied. All five types (historical, implied, future, forecast and seasonal), deserve some explanation and study.

    By Michael C. Thomsett,

    • 0 comments
    • 605 views
  • The Performance Gap Between Large Growth and Small Value Stocks

    Academic research suggests there are differences in expected returns among stocks over the long-term.  Small companies with low fundamental valuations (Small Cap Value) have higher expected returns than big companies with high valuations (Large Cap Growth).

    By Jesse,

    • 0 comments
    • 1,051 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs Expertido