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| From The Editor: Worthy Notions |
Burn Rate
Dwight Cass
01/01/2005
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Most people understand this; two years of terrible performance, one year of great performance (that few people noticed at the time, since everyone was still licking their wounds) and one year of neutral-to-rotten returns has made realists of most of us. For example, we find alternative investments appealing despite their mind-numbing complexity, their manager’s lack of fiduciary self-awareness, the illiquidity of our stakes and the chest-tightening fees they extract. We may be masochists, but the funds have actually delivered positive (albeit tiny) returns this year. (Most, truth be told, are in negative territory on a real—inflation adjusted—basis, but that nuance is drowned out amidst the grinding of our teeth in anguish over all our other investments being down in both real and net terms.)
With the asset side of our balance sheets limping along, it makes sense to turn our attention to our liabilities. Specifically, with the assistance of our advisors and some conservative investment forecasts, we should be able to ascertain just what sort of burn rate we can sustain before we begin to eat into our capital. If our goal is to grow our fortunes, or at least to maintain their current purchasing power, we may have to curtail our rate of expenditure. Indeed, this was a topic of discussion at a recent meeting sponsored by the Institute for Private Investors. One participant estimated that, given the current investment outlook, a private investor who does not want to erode his or her capital would be constrained to a 3 percent rate of expenditure.
Of course, if maintaining our principal is not a priority, our rate of expenditure can rise. But knowing what rate of outflow our investments will support should help us frame our financial decision making and manage our own expectations. That way, we can await the market’s recovery with some degree of calm.Dwight Cass
Editor-in-Chief
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