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Balancing Fear and Optimism in These Unpredictable, Volatile Times

Balancing Fear and Optimism in These Unpredictable, Volatile Times

Steven Bavaria, author of The Income Factory, discusses the challenges investors face in matching their personal needs and goals to their investment strategies during a period unlike any of us has faced before.

The Covid-19 crisis has been devastating for millions of people in the United States and around the world. It is heartbreaking to see the numbers of people whose day-to-day existence has been threatened, both medically and economically, by the disease itself or the loss of jobs and regular income on which their lives depend.

Many of us may not be immediately affected in terms of our ability to put food on the table or pay current bills. But the loss of the sense of longer term security that comes with a major investment portfolio loss can still represent a fundamental threat to our mental and emotional health, as well as to our financial security. It requires us to think and act strategically as we attempt to figure out how best to position ourselves and our portfolios for what the markets have in store for us in the days, months and years ahead.

What that investment strategyshould be in terms of the short-term and long-term actions we take will, of course, not be a “one size fits all” approach, but needs to reflect our individual financial situations. Those of us who are retired or otherwise reliant on our income streams currently (i.e. using them to live on) are much more exposed to the impact of dividend and distribution cuts than those who are still working or have other incomes, and are able to re-invest some or all of their income back into the market at currently bargain prices and higher-than-normal yields. In those latter cases, any dividend or distribution cuts are somewhat offset by the lower prices of the securities in which you are re-investing and compounding, and will have relatively less impact years later when you begin spending the income.

Bottom line: For those who are living on our investment income, raising and maintaining more cash in the event the economy remains depressed and corporate dividend levels end up being cut, may be a prudent move. But if we are confident that we have the income to withstand such a downside scenario, then continuing to re-invest through it may be a great opportunity (as it turned out to be in 2008). Each of us has to make that decision based on our own personal financial and emotional comfort level. There are numerous draconian scenarios – political, economic and social – about what may lie ahead for our country. Whether or not those bleak scenarios represent a 10% or 20% possibility or a greater one, is impossible to know at this point, and each of us has to decide how much risk we can afford to take and how much cash we need to be comfortable – financially and emotionally – until the future becomes clearer.

One consistent theme I see in every investment commentary I read is that nobody, even so-called experts, knows what lies ahead of us as a country, an economy or a financial market. Many of us thought we had prepared for another possibly even worse-than-2008-type recession, with massive corporate default rates but a still-functioning economy. In spite of that, being blind-sided by the Covid-19 pandemic and its still unknown economic consequences has been a humbling experience. As one hedge fund investor said recently, “We always model downside scenarios for any investment we consider,” he said. “But the zero revenue case wasn’t one of them. This is such a dramatic shift from anything anyone has ever encountered.”

Even as some officials and members of the media speak of a possibly imminent re-opening of the economy, other business, financial and medical  experts suggest the economy could be shut down much longer. Most investors don’t know who to believe or what to expect. My goal is to diversify among numerous funds in order to have a wide variety of portfolio managers actively managing those funds and looking for companies that are likely to survive through the next few months or whatever time it takes to come through this period. As a result of diversifying funds and fund managers, I then have hundreds and thousands of managers and executives working in those companies, all of them with “skin in the game” (i.e. their jobs, their bonuses, etc.) to give them an incentive to find ways to keep their company alive and paying its interest and dividends to investors like me. In this way I hope to achieve my goal to have a “river of cash” flowing in from my investment portfolio (my “Income Factory”). Even if some of the tributaries of that river dry up as a result of the downturn, my hope is that the river itself will keep flowing.

(Readers wishing more information are invited to contact the author through his web site:

To read more from Steven Bavaria, check out his book The Income Factory.
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Balancing Fear and Optimism in These Unpredictable, Volatile Times

Steven Bavaria has 50 years of experience in international banking, credit and journalism, having worked at Bank of Boston, Standard & Poor’s, and Investment Dealers’ Digest. He introduced the investment philosophy that became The Income Factory: An Investor’s Guide to Consistent Lifetime Returns on the popular investment blog Seeking Alpha.