Building a Margin of Safety

While the recent market rally improved our financial situation, I am skeptical about the sustainability of the uptrend.  I expect that there will be a significant pullback in the next couple weeks as the spending cuts from sequestration become more likely to happen.   To prepare for this, I am building a margin of safety in our finances to make it through a market downturn, in case the move significant.  Here's what I'm doing:

Short term expense buffer.  Since the 08-09 bear market, we have moved 3-5 years of living expenses into cash or cash equivalents (e.g. CDs).   That way we won't need to sell stocks at a loss to cover living expenses. 

Selling into the rally.  We've been selling stocks in our taxable and retirement at or near the 52 week or all time highs.   This will enable to take some profits, reduce our stock exposure, and buy back at a lower price if the stock market falls.  I am also taking profits in our managed accounts and moving the funds to cash.

Exercising stock options.  With my company stock at all time highs, I'm using the opportunity to cash in on a number of stock options, even though the expiration date is over a year away.  I hope to sell all my options through the 2014 expiration dates.   At this point, I have exercised about 40% of the target amount.

While these actions won't completely prevent our investment accounts from declining in a market pullback,  they should enable us to establish a margin of safety that helps minimize the effects of a significant market decline.

For more on Strategies and Plans Ideas, check back every Monday  for a new segment.


This is not financial or investment advice. Please consult a professional advisor.

Copyright © 2013 Achievement Catalyst, LLC