Know Your Numbers

When Facing Financial Crisis Focus on Meaningful Specifics vs. Vague Generalities

During times of great uncertainty or stress, there is a critical strategy to maintain your confidence that I strongly recommend to you.

The first few months of the COVID-19 crisis was quite an experience and presented all of us with unique and challenging circumstances:

  • First and foremost, the global pandemic, and all the health-related fears associated with it for each of us personally, our families, and our friends.
  • Second, financial markets’ negative response to all the uncertainty, and
  • Third, the government mandated stay-at-home policy which kept all of us isolated with a lot of idle time to stay “tuned in” to our televisions, our computers, and our electronic devices.

Any one of these on their own would be challenging enough.  Dealing with all three at once created a very unique situation and required all of us to be as vigilant as ever in order to remain rational and grounded long-term investors.

Staying tuned in to developments regarding the pandemic and how we could intelligently protect ourselves made complete sense.  The challenge for all long-term investors occurs when that spills over to never-ending “Breaking News” regarding the minute-by-minute gyrations of financial markets, etc.

Unfortunately, keeping your television tuned in to anything market related, and/or checking on-line on your phone, laptop, or iPad throughout the day to see where the market is, or where your investment balances stand at the moment, will not provide you with usable information with which you can act.

It only further perpetuates a lack of confidence, and, in turn “paralysis.”

We know just how troubling scary news is to deal with, especially when you’re at the stage in your life where you’re dependent on The Retirement Bucket™ of investments you’ve built to support you going forward as opposed to relying on a paycheck from work.

It can be challenging to remain confident when the overwhelming majority of voices you hear are negative and scared.

It’s not easy, and it’s not fun.

So, as challenging as it may be, my first recommendation was, and always is, to be very intentional about separating the pandemic’s health related news from financial news.

My second recommended strategy has both psychological and practical benefits which I recommend during any crisis.

I will say ahead of time that I recognize this may appear to delve deeper than necessary, and that I run the risk of having you gloss over it.  However, I believe you have to first understand the way the human brain works.

We’re All Hard Wired

Studies have shown that the human brain is broken down into three sections:

  1. reptilian (back)
  2. mammalian (center)
  3. frontal

The two critical points of understanding for the purpose of our conversation are that the reptilian portion of our brain is our most primitive in that its response mechanism is dictated by “primal instincts”.  Essentially, it’s where our “fight” or “flight” reactions come from when we’re faced with any danger.

By contrast, our frontal lobe is where all critical thinking takes place, i.e. reason, analysis, prioritizing, rational thought, etc.

Now, what does this have to do with how I personally deal with challenges and what I recommend for you right now?  Answer: Everything

The key point is that when we’re faced with a challenge (danger), our initial reaction stems from our reptilian primal instinct, i.e. “fight or flight”.  To overcome this, we have to consciously move beyond this “primal instinct.”

Our brain can only deal with specifics.  Vague generalities, like what we’re fed every day by the media, do not help us obtain the clarity we need to make rational decisions, and, in turn, develop and maintain the confidence we need.  Instead, these vague generalities only serve to paralyze us.

Because of this, my reaction to all challenges is to de-emotionalize myself as quickly as possible in order to place it all in proper perspective.  In other words, I fight to stop the “reptilian” part of my brain from kicking in and dictating my response in a knee-jerk fashion.

Instead, I consciously write out all of the “perceived” dangers, obstacles, and setbacks in specific detail on a sheet of paper.

I then do whatever is necessary to quantify all of them as they apply to me and those around me so that I can make rational decisions and react with a well thought out plan.

How You Can Use This During a Crisis

During any crisis, fear, and the negative emotions that flow from it, are pervasive.

However, each of us has a choice.

We can either engage in the “group think” perpetuated by the media, or we can get specific about what’s really true in your financial life because your brain can only deal with and act on specifics.

Here are some of the “group think” pieces of information and headlines reported by the media during one of the very first weeks of the pandemic:

  • Global Stocks Edge Lower After Oil Prices Jump
  • S. Braces for Surge in Patients as China Tally is Questioned
  • Crude Leaps 25% on Hopes for an End to Price War
  • The Dow Had its Worst Quarterly Performance Since 1987
  • “Selling Fatigue” Has Kicked in, but the Capitulation and Stock Market Bottom May Be Yet to Come, Strategist Says
  • China is Back to Work. But the Specter of Covid-19 Still Haunts the Economy
  • Fed Launches New Lending Facility fFuor Foreign Central Banks
  • This Hedge Fund Saw Risks of Coronavirus Early. Now It’s Up 36%

The challenge with all of this “information” is that it’s just a bunch of vague generalities.  It’s useless in helping you make rational decisions in your own life.

The Alternative: Meaningful Specifics

In contrast, here’s an “example” of meaningful specifics that would help you make rational decisions, and thus help you develop and maintain your level of confidence during a crisis.  Assume for a moment that these facts are your facts and we’re right at the beginning stages of the pandemic:

  • The amount of income you receive from social security and your pensions will be $5,000 per month.
  • Your fixed monthly expenses (per your Lifestyle Cost Estimator™) are $6,000 including income taxes.
  • Your discretionary expenses are $5,000 per month in order to live the way you want, including vacations and gifts for your grandchildren.
  • Given this, you need $6,000 per month ($5,000 of fixed income minus $6,000 for your fixed expenses and $5,000 for your discretionary expenses) from your Retirement Bucket™ of investments in order to make up the difference.
  • Your current Retirement Bucket™ balances after the COVID-19 market correction now total $2,000,000.
  • You and your spouse are 62 years of age and want to plan for at least another 30 years until age 92.
  • You’d prefer to live in your current home and your small condo in Florida as long as possible, so you don’t want to “count” the equity in your homes in your forecasts. If you had to, you would downsize at some point in your life, but would prefer not to “have” to.
  • The nominal annual investment rate of return we determined that you needed to earn in order to continue your monthly Retirement Bucket™ withdrawals of $6,000 (plus a healthy 5% cost of living increase each year) was 60% back in December.
  • After four more months of withdrawals and the impact of the Covid-19 market correction on your Retirement Bucket™ balances, you now have to earn 25% (or 2.25% per year above your inflation target) to maintain your balances to age 92 while providing a 5% annual cost of living increase in your withdrawals.

Given these meaningful specifics, i.e. “knowing your numbers cold”, this example illustrates how you would now know exactly where you personally stand in relation to current market conditions based on your own unique priorities and resources.

It may not provide you with what you might interpret as “good” news.  However, it does provide you with facts that you can make decisions with, such as how you choose to position your Retirement Bucket™ from here forward, or how you choose to spend in the future.

As I mentioned earlier, tuning in to “Breaking News” all day on your television, and/or checking on-line on your phone, laptop, or iPad throughout the day to see where the market is, or where your investment balances stand at the moment vs. the all-time high, will not provide you with usable information with which you can act.

It only further perpetuates a lack of confidence, and, in turn “paralysis.”

Given the stage in life that you’re experiencing right now where you’re contemplating having The Retirement Bucket™ you have accumulated over all these years support you, you have every right to be anxious and frustrated during a crisis.

However, as we just illustrated, do everything you can to focus on meaningful specifics as opposed to the vague generalities splattered all over the news every day so you can continue to confidently live the way you want.

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