We are currently experiencing some very tough economic times but let me state up front that I’m still optimistic about the long term political and economic success of this country. I do not believe we’ll slip into cataclysmic failure and cease to exist as a free country. In my opinion, and I hope yours, the United States will continue to be a viable political and economic state and prosperity will eventually return. The big question, however, is when.

It would appear that the optimist’s view of a mid-year 2009 economic recovery is very unlikely. Most reasonable estimates now predict recovery in early to mid-2010 and some even later than that. If that’s the case then anyone who is broadly invested or sitting on cash reserves for investment will need to be patient and allow a period of probably 3-5 years for the market to (hopefully) fully recover. Your ability to maintain exposure in the markets and avoid selling your investments before they have had a chance to recover will to a large extent determine if you make back losses or cause irreparable damage to your portfolio. Getting an understanding of your staying power is critical to help you through these bad times.

If you derive any income from, or are living off an investment portfolio, it will be very important to consider how much income is reliably generated, how much cash is available and, most importantly, how fast you are using it up. In business terms, this rate of cash consumption is often referred to as a "burn rate". If your portfolio is producing sufficient income to cover your burn rate then you should be in good shape. But be careful, if you have a substantial amount of cash in low yielding money market accounts or bank deposits, you may be earning far less than you think and burning through your cash reserves. Do a quick calculation to see how long your cash will last and if necessary try to lower your burn rate to ensure you aren’t eventually forced to liquidate other assets at depressed prices. Start by estimating a sustainable cash draw from your portfolio that will enable you to go at least 3 or 4 years without liquidating underwater assets. Then look at your spending patterns to see what you can cut to bring your burn rate (spending) in line with your sustainable cash draw. It may not be easy but you won’t be alone in trimming expenses and you’ll be making responsible changes to help get you through these bad economic times.

The effort you make to limit your burn rate and lower your portfolio withdrawals will be well worth it in the long run because you’ll avoid or at least postpone selling investments at a big loss and give your portfolio more time to recover. Cutting your expenses and lowering your lifestyle a bit now is far preferable to permanently lowering it later.

Randy Gridley

February, 2009