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The Boat Analogy

The Boat Analogy

| January 23, 2020
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Some financial planning methods rely heavily on bonds. A good financial plan should be balanced with a diversified portfolio. A great plan should be more customized to your cash-flow needs.  In retirement, your fixed income should be targeted to mature when your plan has an income shortfall. Given the current economic conditions and the Federal Reserves policies bonds should be limited as they are unlikely to outpace inflation. However in the short term, bonds are needed for cash flow and balance. 

Think of your portfolio as a boat. It needs to be headed where you want to go at an appropriate and safe speed.

The bonds are the ballast, the rocks at the bottom of the boat. Those rocks stop the boat from tipping over.

Your stocks are the sails, paddles, or motor. Bonds are not supposed to move your boat forward. Bonds are there to keep your boat steady and prevent it from tipping over. Without bonds, as reliable safe cash flow, your boat may more easily flip over. Too many bonds, however and then your boat not only does not float, it sinks. Too many sails can cause you to go too fast and you may find yourself careening towards danger. Even with a good ballast and motor its imperative to know where you want to go,

Life vests and other safety mechanisms provide security. These are your contingency plan. While they are not cheap and we hope to never use them, they are there for you in stormy waters.

Let us take this a step further. Consider when a recession, a bear market, or other negative economic factors occur. Those are waves and weather; these are all things that cannot be controlled. Because we built and are navigating your boat, we understand how much balance is required and we want those bonds maturing when you need them.  If your destination changes please alert us as soon as you are able.

This is why a balanced and diversified portfolios are so important. It is almost like cheating to have reliable cashflow in retirement in case a situation where cash is needed, nothing would need to be liquidated at a loss. 

Life is messy and anything can happen. It's best to keep that balance between the ballast and the sails (bonds and stocks) and have contingency plan with safety features. That way, no one has to worry about the weather.  And remember Goal, Risk Capacity, Risk Tolerance, Return, Taxes, Complexity, and Cost are our priorites when getting you to your Need, Wants, and Wishes.

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