Questions answered: How do investors approach down markets? Why do you need to have more than just a good financial plan? How do you implement the guardrails approach?
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Key Takeaways:
- Create a financial plan.
- How much do you need to live on? What other income sources will you have in retirement? Will your portfolio be meeting all or part of your expenses?
- You will start to get a sense for how your portfolio fits into your retirement plan.
- You need to know what your investments need to do in order to supplement your non-investment income sources, to create your desired standard of living in retirement.
- How much do you need to live on? What other income sources will you have in retirement? Will your portfolio be meeting all or part of your expenses?
- Create an investment plan.
- Understanding how you should be allocating your portfolio to different investments to generate cashflow.
- The Guardrails approach:
- Do you have enough stable or conservative investments plus enough diversified growth investments to be able to generate income for yourself regardless of what’s happening in the market?
- You want to make sure you have a few years of conservative investment set aside to be able to see you through a downturn.
- Doing this approach allows you to set up a dynamic set of rules that tells you where you pull income from.
- Do you have enough stable or conservative investments plus enough diversified growth investments to be able to generate income for yourself regardless of what’s happening in the market?
- It’s not the total portfolio value that matters as much as the contents of that portfolio.
- Every downturn is the best-case scenario for long-term wealth creation.
- Buying things at a lower value is better than buying things at a higher value.
- Maintain perspective.
- You own real companies. You don’t own the stock market.
- What’s happening is horrible, but will it impact the value of your investments over time?
- Since 1950, The average peak to trough drawdown in a given year is -13.6%. The S&P 500, today, is down around 13%.
- The worst days happen during the worst times, but so do the best days.
- Maintain perspective about your thinking.
- There’s always going to be something that seems like it could be the cause of the next market downturn.
- Be courageous.
- These market environments are a test of your resolve and character.
- In the moment, we don’t have the benefit of hindsight to see how we get out of a crisis.
- We don’t know how these things will resolve, but we do know that they will.
- Those that succeed financially don’t necessarily have better financial strategies. They exhibit resolve in the face of intense uncertainty.
- To be a successful investor, you must value financial independence more than the pain of short-term losses.
Episode Timeline:
[00:05] Episode context.
[03:05] Create a financial plan.
[05:45] Create an investment plan.
[07:12] How to use the Guardrails approach.
[14:34] Maintain perspective.
[24:25] Be courageous.
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