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Staying Calm: Thriving in Volatile Markets

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Co-authored with Beyond Saving.

Since August, market sell-offs have initiated a rebound, hinting at a possible bear market. As recession risks loom, preparation becomes vital for investors amidst potential sell-offs.

During market downturns, maintaining composure is crucial. A widely used military adage, β€œSlow is smooth, smooth is fast,” emphasizes the importance of deliberate and controlled decision-making over impulsive reactions.

Recognizing Cues to Step Back

Reacting impulsively to market movements can be tempting, but it’s essential to recognize warning signs and refrain from impulsive actions. Investing is a long-term endeavor, and hasty decisions can derail a well-developed strategy.

Investment strategies refined into fundamental components assist in methodical decision-making and maintaining a principled approach.

Implementing a Methodical Strategy

Breaking down your strategy into fundamental parts assists in logically approaching investment decisions. The Income Method strategy outlines important considerations:

  1. Construct a portfolio with an average current yield of 8-10% from income-producing investments.
  2. Allocate 40% to fixed-income investments such as preferred equity, bonds, or fixed-income closed-end funds (CEFs).
  3. Diversify individual holdings, targeting no more than 2-3% in any single investment.
  4. Withdraw up to 75% of the portfolio’s income and reinvest the remaining 25%.
  5. Focus on increasing income and income quality in investment decisions.

Assessing Each Fundamental Component

1. Target Yield: 8-10%

Targeting an 8-10% yield provides a reasonable return with moderate risk. This aligns with long-term total returns of the S&P 500, offering stability within fluctuating market conditions.

Emphasizing dividends for market returns helps in sustaining income and reinvestment, fostering portfolio growth.

2. Healthy Fixed Income Allocation

Emphasizing fixed income, known for predictable income production, provides stability during economic stress compared to common equity, which is subject to dividend cuts during market downturns.

3. Individual Diversification

Maintaining small position sizes reduces financial and psychological impacts from individual holding collapses. Balancing underweight and overweight positions ensures diversified exposure.

4. Reinvestment Resources

Limiting withdrawals to 75% of portfolio income fosters reinvestment and provides a buffer against potential dividend cuts. Planned reinvestment, based on incoming dividends, encourages disciplined portfolio growth.

5. Focusing on Income

An investment decision’s impact on income, safety, growth, and portfolio goals forms the crux of the Income Method. Prioritizing these aspects guides effective decision-making.

Adopting the Methodical Approach

Refining your investment strategy into fundamental components encourages a deliberate and informed approach. Assess the impact of each decision on your overarching investment goals and income stream.

Market fluctuations, whether in the red or green, present opportunities for strategic investment. Revisiting your strategy’s fundamentals during market stress reinforces disciplined decision-making.

Embrace the methodical approach to your investments, paving the way for achieving your goals with confidence and composure.

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