Prior to joining Foster Group in 2007, I spent 15 years working in corporate finance. Despite this background, I soon realized how little I understood about financial markets.
I vividly remember sitting in a colleague’s office hearing the principles and evidence behind our investment philosophy. It was an ‘aha’ moment for me. I felt like I wanted everyone to hear what I had just heard.
One of these principles is that portfolios should be constructed with purpose and aligned with the needs and temperament of the investor. If you’re a client of ours, there’s a good chance you’ve heard us mention our ‘Lifeboat Drill’ when speaking about your portfolio and assessing whether your portfolio is constructed to match your plan.
The lifeboat drill attempts to quantify both the magnitude and timing of withdrawals from your investment accounts as you approach retirement, so that you have dollars set aside for both short-term withdrawal needs and long-term growth. We think meeting these needs, short-term withdrawals and long-term growth, requires 3 distinct ‘Buckets.’
Bucket #1: Purpose – preservation
The first bucket holds portfolio dollars needed in the next two years. These dollars should be held in investment vehicles intended to preserve principal value and, hopefully, keep pace with inflation. Our investment of choice for this bucket is short-term, high quality bonds that provide some return but little risk of loss.
Bucket #2: Purpose – moderate growth, diversifier to stocks
The next bucket holds portfolio dollars needed in years three through eight. We believe these dollars should be invested in bonds with longer maturity and broader credit quality. These bonds have historically done a better job of offsetting negative returns in the stock markets while still dampening the overall volatility of your portfolio.
Bucket #3: Purpose – growth
The last bucket is filled with the rest of your portfolio dollars. These are dollars you won’t need until eight to nine years from now. From an historical perspective, this gives you extremely strong odds of avoiding selling anything in your portfolio at a loss. We believe stocks and alternative investments are appropriate for this bucket because we want these dollars to grow.
One way to improve your investment experience is to walk through our lifeboat drill. We have seen many clients come to a much deeper understanding regarding the variety of investments they hold and the importance of the different buckets in their portfolios. This understanding leads to confidence and patience with their portfolio, which is an important ingredient for investing success. We’ll look at your expected expenses, capture your sources of future income, get to know who you are, and put together a portfolio that not only gives you confidence your cashflow needs will be met, but helps you pursue your dreams.
We truly care about our clients’ goals, whether they’re planning for their families’ futures or planning to make the future better for people on the other side of the world. If you would like to learn more about our investment philosophy and our lifeboat drill, please contact us.
All investment strategies have the potential for profit or loss. Fixed income securities are subject to increased loss of principal during periods of rising interest rates. They are subject to other risks such as changes in creditworthiness, market fluctuations, liquidity concerns, prepayments, early redemption, negative corporate events, and tax law changes.
Alternative investments are speculative and involve a high degree of risk. Investors could lose all or a substantial amount of their investment.
