Overexposure

I don’t know about you but I’m feeling very exposed lately. Exposed to what, exactly? Everything. Inflation, interest rates, the stock and bond markets, our dysfunctional politics, geopolitics, cultural and demographic shifts, the growing risk of this or that. Each would make for interesting theoretical discussions as a one-off or even a pair. But now they’ve all seemed to coalesce into something much larger, a problem greater than the sum of its parts.

In a way this reminds me of Warren Buffet’s quote about only seeing who’s been swimming naked when the tide has gone out. He was probably thinking about how good times can allow poorly run companies to continue for a while until markets turn and investors start caring about risk again. The quote also works well for personal finance if you put yourself in the company’s role. Are we managing our own situation like Enron, or are we really in much better shape and just feeling extra anxious because of tumultuous headlines and prices at the pump?

How we feel about this is primarily a psychological issue and that’s not where my expertise is. That said, I’m human and am willing to admit to feeling the weight and needing a reminder that I’m okay, even though so much around me isn’t. Funny, that sounds just like what we were talking about last week, right?

Since my corner of the world is all about personal finance, here are some questions to assess your level of exposure to the financial side of all this. Hopefully the end result is at least a little relief from the stressful times we’re living through.

Is your income secure? This question alone can lead to lots of anxiety, but think about it: Is your job pretty steady? If you own a business, how’s your cashflow? If you’re retired and much of your income is from Social Security and pensions, are the checks clearing? All kidding aside, consistent income is the bedrock of your household’s financial well-being and leads into these next questions.

Do you have cash on hand to cover at least six months of household expenses? While there’s no one right amount for the size of your emergency fund, six months is a good target. This should provide time to pivot if you lose your job or have a large emergency expense. But remember this is based on your typical spending and doesn’t include buying big-ticket items in the next year or so. If those expenses are on the horizon you should add that money to your emergency fund so as not to draw it down too low. A much smaller or nonexistent emergency fund leaves you exposed to a number of risks beyond your control.

Do you have enough cash or short-term assets beyond your emergency fund to cover larger expenses expected sometime in the next 3-5 years? Maybe this is tuition money, a car purchase, buying a house, or even starting your own business. Whatever the expense, having those dollars allocated to no-risk or low-risk assets such as CDs or shorter-term bonds eliminates your exposure to stock market volatility for those expenses – five years or less is no place for stock investing. And interest rates are higher now, so this money can actually earn something in the meantime.

Where you hold this money is important as well. It should be easily accessible without large fees or other restrictions and can be at your bank or credit union, or an investment account somewhere. Ideally, short-term spending shouldn’t come from your retirement account unless you’re already retired. Sometimes life happens and you need to withdraw retirement money early because, well, you need it and that’s where it is. I had to raid my 401k when I started this business back in 2014, so I get it, just be extremely careful about the details.

Are your longer-term investments managed appropriately? I don’t mean are they making money right now, because your investments are likely down quite a bit from a year ago. Instead, I’m referring to quality, proportion, and cost of the investments in your portfolio. If you own good stuff in the right proportions and the values are all over the place due to the world today the best thing to do is hold on. Buy more if you’re still accumulating. Hunker down if you’re retired.

I’m rebalancing client portfolios and harvesting losses where appropriate. This is important and helps performance in the longer-term, but there’s little else to do in the meantime. You should be able to weather this just fine if you have adequate assets to cover the short-term categories mentioned above. If not, you’re overly exposed to market risk and should either cut your losses and rebuild from the ground up or tough it out and hope it out, so to speak.

Are your debts manageable and sustainable? Ideally, these days your debts should cost 4% or less on a fixed rate. Student loan debt has lots of twists and turns to it, but payments should be manageable within your current budget. If your debt is more expensive or you’re carrying credit card balances, this is “bad debt” that you’ll want to prioritize paying off based on rate and terms.

If you can answer yes to each of these questions it means you’re probably less, or even much less, exposed to today’s craziness than you think. You can ride out market volatility because you won’t have to sell stocks to cover near-term expenses. You can let your portfolio and your humble financial planner do their work. In other words, you’re wearing a wetsuit versus swimming naked.

Lastly, I suggest keeping a record of your basic financial information that you look at regularly. Mine is a super-basic Excel spreadsheet that I’ve used for years and manually update every workday. While I love automation and have access to lots of fancy tech in this area, I like the manual process for this because I have to log into accounts and personally fill in the cells, keeping me closer to the information. It doesn’t take long either, maybe 10 minutes or less most days.

Updating my spreadsheet reminds me of what I have at least some control over, like our personal income, spending, savings, and overall structure. It also helps me better understand my actual versus perceived exposure to everything going on out there in the world. I highly recommend you do something like this, whatever format you choose, and regardless of how much money you have. We all have to start somewhere, right?

Have questions? Ask me. I can help.