Sustainability May 22, 2013Expert BlogsOff

PINK’s provocative challenge this week relates to the economic component of our environmental sustainability. In previous blogs, I’ve issued the challenge to calculate another point of financial stability: your personal financial sustainability. How long could you live on safe assets/earned income before gyrations in your portfolio force you to sell at a low?

One girlfriend answered this query recently with bluntness: she has the cash to last through year-end and no further. This friend, an accomplished professional in business for herself, has to sell work for her firm before the end of 2009 or… or what’s next?

Her acute sustainability challenge is to figure out if she should continue to work for herself or try to pursue a corporate job (one that may or may not exist in this environment!). Her question is another form of the classic investment question, “Can I take this risk?” or “What is your risk tolerance?” Your risk tolerance should be measured by your ability to out-last market risks. For my friend, her risk tolerance is getting shorter daily. She could abandon her business now to seek a traditional job, increase her investment in her company to drive up demand for her services, or cut her operating costs further than they’ve already been slashed to extend her cash reserve beyond year-end. Her risk tolerance is getting shorter, but all of these choices involve risk; none offer a guaranteed pay-off; all, given enough time, could be profitable.

Our investment portfolios face challenges that are no different than this small business question. For the investor who is frustrated, even bitter, that 15 years of equity investments in her 401k now total less than she originally contributed, her choices are the same:

1. Sell the equities now, hold the proceeds in cash.

2. Increase her 401k deferral to make up for losses while still trying to achieve retirement on time and in the style towards which she was aiming.

3. Re-direct her 401k deferral to more stable investments, risking under-performance over time.

From the perspective of a financial planner, option #2 is ideal: buy more equities while they’re depressed, while simultaneously decreasing your costs of living. Still, this answer might not be right based on the investor’s risk tolerance. My girlfriend with her business on life support is like an investor faced with these three choices in the year before her retirement.

On the other hand, if you really aren’t retiring in the next 7-10 years, don’t choose #1. You have to calculate your sustainability – and sometimes take active steps to extend it – in order to reach even a portion of your financial goals.

By Marie Claire Allvine

Share this Article

Recommended

See all
CLICK TO SUBSCRIBE to Your PINK eNewsletter.

What’s Hot
See all

Little Pink Book