A Risk-Resistant Portfolio Is Not About How Much Cash You Hold, but Whether Your Cash Flow Can Survive the Worst 15 Years
Your free cash flow should be able to withstand the market's harshest tests, whether you are still working or already retired.
Your free cash flow should be able to withstand the market's harshest tests.
Think through an extreme scenario: your home is damaged by a natural disaster and you have to rent somewhere else; the mortgage still has to be paid; the stock market crashes almost to zero; your existing loan payments cannot stop; you suddenly lose your job; you are unfortunately diagnosed with a major illness; even your stock-backed credit line is tightened, so you can no longer borrow funds.
If all of these risks happened at the same time, would you still have enough cash flow to maintain your life?
If you are still working, cash is mainly for an emergency reserve. You need to estimate how long it usually takes you to find another job after losing one. The living expenses you need before finding the next job are the cash position you should keep, so you can get through the hardest cash-flow period.
If you are already retired, the situation is completely different. After retirement, there is no employment income, so you must start the calculation from a market high and make sure the cash flow generated by your asset allocation can support at least 15 years of living expenses.
Please note: this does not mean preparing 15 years of cash. It means owning cash flow that can support 15 years of living needs.
For example, with an 80/20 asset allocation and a 2% annual withdrawal, or a 70/30 allocation and a 3% annual withdrawal, the cash shown on the books may only equal about 10 years of living expenses. However, in a high-dividend asset allocation, the cash flow mainly comes from continuously paid dividend income. Therefore, "15 years of cash flow" comes from dividends and is completely different from a "15-year cash position."
A truly risk-resistant portfolio is not about how much cash you own. It is about still having continuous cash flow during the hardest moments.
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