Monday, April 13, 2020

Of Emergency Fund And Liquidation Of Portfolio (To Tide Things Over)

A global recession is in the works; Due to the disruptions caused by the measures (e.g. lockdowns) in response to the COVID-19 pandemic, the global economic machine has slowed down tremendously. Unless a quick relief, like a vaccine or falling rates of infection, takes place, a longer delay may result in irreversible changes, as businesses may not sustain the fixed overheads despite grants, force majeure of loans and contracts, and macroeconomic stimulus being rolled out. The entire global economy, like a huge machine, is made up of different parts (countries, sectors, industries, companies, etc.) that are interdependent on one another. A stop in certain parts of the machine will cause others to slow down, and a prolonged halt may cause the whole thing to be damaged.

With this, individuals like you and me not only being preoccupied of keeping one’s family safe from the pandemic, but also keeping them sustained with a constant flow of income. In such times, for most of us, our primary sources of income, which are employment and/or business/profession, could be threatened, in terms of a huge reduction or worst case, a total cut-off. Even if we have secondary sources of income such as from investment portfolio and/or properties, these, too, are likely to suffer a cut as almost everyone and everything around are facing the same issue.

There are a few ways to mitigate this predicament, such as adjusting the lifestyle and cutting down on unnecessary expenses, look out for some side gigs to tide things over, and/or use your network built over the years to gain some opportunities. For this post, I will take on the investment portfolio side of things and most of the points here are related to what I had in my eBook.

The Emergency Fund

The emergency fund, by definition in my eBook, is for you to tide over unexpected situations in life, such as sickness, unemployment or just about anything that will eat into your money1. I had also mentioned here that the emergency fund is separate from your savings. There is no agreed upon quantum as it depends on your income, expenses and number of dependents.

I had recommended that the emergency fund be built before starting any investment, as this amount is treated as a buffer between your daily monies and the investment pool. If a drawdown has to be done, do it from the emergency fund first. 

The Cash Component

Depending on the size of the emergency fund, it should last at least a month or two and hopefully the COVID-19 would be controlled or optimistically be gone by then. However, if it does not abate, and if there are not many or ineffective alternative income streams, then the painful decision of drawing from the investment portfolio is to be made.

If you are following the Bedokian Portfolio’s methodology or any others of having a cash component in the portfolio, then shift that amount back into your emergency fund.

Partial Liquidation Of The Portfolio

If the conditions, be it the COVID-19 or your other income streams do not improve by the time your cash component is used up, then the liquidation of your investment portfolio is inevitable. Frankly speaking, by this time the portfolio would have shrank and the equities and REITs asset classes would have been hit the hardest.

The next question will be what to liquidate first? For this, my opinion is to firstly suspend the notion of asset class allocation and diversification temporarily. Secondly, see which asset class(es) the market is flocking to (note: capital moves between those that provide the greatest returns during boom days and the greatest safety during bust days), and liquidate that off, which in this case government bonds and commodities (especially gold and silver) are the probable ones.

For individual securities, you could use the selling triggers2 in the eBook as an initial screener, then conduct a full fundamental analysis before deciding if the counter is to be kept or sold off. At this stage you must be objective and keep your emotions in check; never mind the losses incurred or harping on the efforts in building up the portfolio. Live today, fight tomorrow. Once the whole thing blows over, set a time and conduct a full rebalance of your battered portfolio to the preferred asset class allocation.

Stay safe, stay liquid and stay invested.

1 – The Bedokian Portfolio, p64-65
2 – ibid, p101-103

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