How Strong Is Your Emotional Armor®?
April 1, 2019
It’s easy to stay emotionally strong when the markets are soaring and your investment statements show double digit returns, but it’s another thing all together when we have the kind of market drops we’ve experienced over the past few weeks. Though history has shown us that the market always rebounds and grows over time, the psychological blow and fear that kicks in when your monthly statement shows a downward spiral can be enough to throw anyone into a tizzy. But this is exactly the moment you need to put on that Emotional Armor®, buckle up and hold firm. Because history tells us that the worst thing you can do is sell when the market is low.
So how do you ensure you’ve got the strong Emotional Armor® you need to weather any turbulent market? This is what my comprehensive Emotional Armor® training guide addresses in depth — and you can download it for free HERE. My training guide covers two key Emotional Armor® building exercises: establishing an unconditional belief that the capital markets will increase over time, and knowing exactly what your lifestyle costs and how to support it.
Having an unconditional belief that the capital markets will grow over time is paramount for anyone investing in the stock market, and is something I cover at length in my training guide. But for the purposes of this blogpost, I am going to focus on the second component: knowing what your lifestyle costs and how to support it.
I’m not just talking about generals such as your mortgage and car payments, I am talking about specifics, right down to that daily latte you enjoy. Knowing what your lifestyle costs is critical to developing your Emotional Armor® and if you haven’t already done so, now is the time to start figuring it out. Once you know exactly what your lifestyle costs, here are a few steps you can take that are guaranteed to turn your Emotional Armor® into steel:
- Figure Out Where You Can Cut Back. Yes, you heard me right. Figure out where you can reduce your expenses. It’s not a novel concept, but one that is rarely discussed in the financial services industry. Everyone talks about investing more. But what’s wrong with a little belt tightening when circumstances require it? I’ve done this exercise for myself, and I can tell you that one of the first things to go for me would be my beloved boat, Irish Luck. Do I want my boat? Absolutely. Do I need it? Heck, no. Saying goodbye to Irish Luck would sting, but knowing that I can immediately slash my annual expenses is a huge layer of confidence for me.
- Identifying Different Sources of Income. Now that you know what your lifestyle costs and where you can cut back, it’s easy to figure out the minimum amount you need to get by. The next step in building your Emotional Armor® is to identify different sources of income streams to cover your annual base. This is unique to you, because no two circumstances are alike. But here are some different ways to ensure you are always covered — regardless of what the market does.
- Have Cash/Bond Reserves You Can Tap. Assume you’ve determined your bottom line living cost comes to $100,000 a year. Historical data tells us that a bear market typically lasts a little more than two years. With this knowledge, what if you allocated your investments so that you have $300,000—three years of living expenses, just to be conservative—in cash reserves, bonds, or other short-term debt instruments that you could easily access during a market downturn. Wouldn’t that give you some emotional peace of mind and provide another layer of confidence?
- Living on a Fixed Percentage of Your Investment Portfolio Each Year — No Matter What. Here is how you can make sure you never run out of the money in your investment account. You decide to only take out five percent of your investment portfolio each year, come hell or high water. Let’s say you have a million dollars in your investment portfolio, so following the five percent rule, you take out $50,000 to live on for the year. Over the course of the next year, the return on your assets replenishes your $50,000 and then some — bringing the value of your investment portfolio to $1.1 million. This means that for year two, the five percent you take out comes to $55,000 — enabling you to splurge a little. Now let’s say the market goes down some, and by the time you are ready to take out money for the third year, you only have a total of $900,000 in your investment account. This means that the five percent you take out for year three is only $45,000. As long as you can stick with the five percent rule each year — in both good times and in bad — you will never run out of money.
- Pensions and Part-Time or Full-Time Work. Hopefully you have Social Security, which is a godsend for many people. But, if you happen to work for the government or a company that provides you with a pension, that’s a wonderful source of revenue you can count on — which in turn provides yet another layer of confidence, because it means you don’t have to depend as heavily on your investments to cover your living expenses. If you are passionate about the work you do and would like to continue working as long as you’re able, that’s also a huge layer of confidence that helps to build your unique Emotional Armor®, because you know you’ll continue to have money coming in. Who says we have to retire at sixty-five? It’s just an arbitrary number.
- Get Out of Debt. It takes some discipline and persistence, but if you can buckle down and pay off your debt, the payout in terms of peace of mind and strong Emotional Armor® is huge. If you have no mortgage, car payment, credit card debt or any other type of debt, imagine how much that reduces your cost of living. You are eliminating thousands, and potentially tens of thousands of dollars, in interest and expenses that you no longer have to pay.
These are just a few Emotional Armor® building tips to help you hold firm regardless of market performance. To go deeper, please download my Emotional Armor® training guide now. Click HERE to get started.
Copyright 2018 by Walter F. Burns. All rights reserved.