Build Investment Asset Buffers to Protect Yourself from Market Volatility

Build Investment Asset Buffers to Protect Yourself from Market Volatility

You may be just as nervous as the next person is about investment risk. However, the coverage of your future expenses by your accumulated assets will determine whether you can actually manage, when risk really happens.

A previous article, “The Solution - ONLY follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient,” suggested that individuals are much better off with a well-considered financial viewpoint. A stable set of financial beliefs can help you to keep focused and on track throughout your life. This follow-up article discusses the need to build asset buffers to anticipate future turbulence in asset market values and personal income.

Securities markets have more often delivered good rather than bad returns, which makes them worth participating in, if you can tolerate the volatility.

However, sometimes the equity markets in particular can decline in a very nasty manner. You can never tell when this will happen or whether it will be quick or slow. Rates of subsequent recovery in equity market values are similarly unpredictable.

Therefore, one requirement of investing is to ensure that you can ride out these negative equity market vicissitudes without being forced to liquidate or sell in a panic. More substantial asset buffers and better knowledge of the projected coverage of your expenses by your less volatile cash and fixed income assets will help you to ride out these bad times.

How VeriPlan can help: VeriPlan projects the safety margin that your cash and fixed income assets may provide to cover your projected expenses. This feature compares your projected expenses against the projected value of your cash and shorter-term fixed income assets. It simulates the situation when, simultaneously, the equity markets decline significantly and you lose all earned and retirement income sources. However unlikely this may seem, it tells you how strong you boat could be.

Related Personal Financial Planning Posts

• Retirement Savings Needs of Renters Without Financial Planning Improvements ( Retirement savings needs of renters prior to any financial planning improvements Starting to plan with a non-optimal baseline projection Fran and Fred Frugal, both age 30, are a married working couple with $100,000 in combined annual earned income. They want to understand how valuable different personal finance strategies could be to their lifetime finances and retirement security. [...])
• Early Retirement for Renters through Investment Cost Reductions ( Early retirement for renters due to investment cost improvements and higher savings rates Improving on Fran and Fred's lifetime financial plan with earlier retirement Fran and Fred Frugal, both age 30, are a married working couple with $100,000 in combined annual earned income. They want to understand how valuable different personal finance strategies could be to their [...])
• Nationwide S&P 500 Index Fund - Class A Shares (GRMAX) fetch a +2 Fund Authority Score (Fund Authority Scores rate mutual funds and exchange traded funds (ETFs) on the most important economic factors that influence individual investors' net long term diversified investment fund performance. The Skilled Investor developed the Fund Authority Score system to provide individual investors with concise and objective summaries of mutual funds and ETFs for comparisons within investment [...])
• The Cost of Investment Counselors When You Pay Investment Sales Loads ( How expensive is financial advisor compensation paid via sales loads? A sales load might be the method that you prefer to compensate your broker or advisor. If your advisor is truly competent and ethical, he may be able to manage properly the inherent conflicts of interest that are associated with commissioned investment product sales. Even if [...])
• How unstable have stock market returns been over time? ( Common stock equity market returns have varied widely in the past. The common stock equity risk premium has averaged about 4.1% from 1872 to 2000. The equity risk premium is the equity market return less the risk free rate of return. The risk free rate of return includes both the inflation rate and the risk free [...])
• Carnival of Financial Planning - December 13 2007 Edition (Welcome to the December 13, 2007 edition of the Carnival of Financial Planning. The Carnival of Financial Planning takes a long-term view of personal financial planning for individuals and families. We focus on efficient and sustainable personal financial planning practices that can lead to lifetime financial security. This edition is arranged by subject heading, so that [...])
• USAA S&P 500 Index mutual fund Member Shares (USSPX) capture a +9 Fund Authority Score (The table below in this article presents The Skilled Investor's Fund Authority Score and other information for USAA S&P 500 Index mutual fund Member Shares (USSPX). The diversified investment fund strategy of the USAA S&P 500 Index mutual fund Member Shares (USSPX) According to its prospectus filing on the U.S. Securities and Exchange Commission EDGAR system, the [...])
• Use Caution with Classical Investment Books ( Use Caution with Classical Investment Books - A Tip from The Skilled Investor Individual investors should exercise caution when applying the tactics of classical investment books to current markets. The more handcrafted, seat-of-the-pants, and individual actor approach to the securities markets in the pre-computer, pre-networking era has given way to different practices. What might have worked [...])