A few lucky people here and there have managed to leverage being fired from a job into a positive life-changing event. For most, though, it's a traumatic, stressful and potentially financially devastating shock. Although your investment portfolio cannot prevent you from getting fired or find you a new job, there are steps that the unexpectedly jobless can take to minimize the damage to their long-term financial future.
SEE: How To Fireproof Your Budget?
Evaluate the Situation Honestly
Before tackling the portfolio ramifications of losing a job, it's important to take an honest look at the situation. Why were you fired? Was it a "no fault" situation like a large layoff or post-merger restructuring, or was it for cause? Along similar lines, what is the job market like in your region or your industry, and are you able (and willing) to move to take a new job?
What this all comes down to is a simple question – what are the chances that you'll get another job soon, and one that it is relatively similar in pay and benefits?
Another aspect of your situation to evaluate is your cost structure. What are your truly essential costs? If you don't already have a budget, and one that makes it relatively easy to categorize discretionary and non-discretionary expenses, now is a very good time to start.
SEE: Jobless Growth: Are You Prepared?
Step One - In Case of Emergency
The best way to "fire-proof" your portfolio is to never have the need to dip into it at all. We at Investopedia have long advocated that workers should establish an emergency fund to cover sudden expenses like an illness, a replacement car or job loss. Ideally, then, you will already have six months of expenses in a high-yield savings account. While not everyone may be able to put this much away (and some stretches of unemployment may last more than six months), a sudden job loss is just the sort of emergency that this savings item is intended to help cover.
Step Two - Cut and Rearrange
Cutting out unnecessary spending should be the first step to take, whether you have an emergency savings account or not. Going draconian from day one (no cable, no dining out, no nothing) may actually be counter-productive and deepen the depression that often goes with a job loss, but it is nevertheless important to cut expenses to a minimal level.
The next step is to rearrange your portfolio to reflect your new reality.
If you don't have six months' worth of expenses tucked away in a safe place, finding that money needs to be the first step. It makes sense to target your most overvalued positions first, but you must also be aware of tax consequences - selling a big winner late in the year could leave you with a larger tax bill than you expected and make your short-term cash flow problems even worse.
SEE: What You Need To Know About Capital Gains And Taxes
Assuming that you can identify six months' worth of sales candidates (ideally overvalued, but with relatively low capital gains), sell them and move the proceeds to either an online savings account or a money-market fund. The most important considerations with these funds are that they remain safe; you cannot afford to lose this money.
Step Three - Rearrange Some More
After the expenses for six months have been covered, it is time to think about additional changes to the portfolio. In particular, you need to think about your portfolio in terms of your short-, intermediate- and long-term needs. Ideally you will not need to go beyond the first six months (the short-term), but in an ideal world you wouldn't have to go through any of this in the first place!
Your short-term portfolio is the aforementioned six months of living expenses. There's not much room for argument or debate - this money needs to be in safe, accessible assets (like a savings account). You won't earn much of anything on this money, but that's the price of liquidity. Resist the urge to go with options like short-term bond funds; while they tend to be quite safe over the long haul, they can drop enough over one or two quarters to shave off a month's living expenses.
The intermediate portfolio is the one you really hope not to need. This is a portfolio that will cover another six to 12 months of expenses, should you run through the first portfolio and still not have a job. Since you may be selling these holdings relatively soon (six months), holding individual stocks could be risky. It makes more sense, then, to shift this money into quality stock and bond funds (individual stocks are risky, but equity funds are a little less so). Think high-quality here, and beware of funds that have shown significantly worse declines than the market in prior periods.
Last is the long-term portfolio. Hopefully you will not need to change or alter this portfolio at all; this is your regular long-term portfolio that you have been building in order to retire better, buy a house, pay for the kids' tuition or what have you. The large majority of this portfolio should be held in equities, whether it's individual stocks, exchange-traded funds or mutual funds. While I would not recommend radical changes to the long-term portfolio, it does make sense to incrementally reduce your risk - this is not the time to be taking big risks on some speculative biotech or tech stock.
If you find a job within the six months, then you can use the leftover short-term and intermediate portfolios to top off the emergency savings and then get back to your regular investing approach. If the bad times stretch out a bit, every six months or so you can reevaluate your holdings, moving funds from intermediate to short-term and long-term to intermediate as necessary.
Things to Avoid as Long as Possible
Along with "what to do," there are a few "what not to do's" to keep in mind. First, avoid unnecessary risk like the plague - this is all the money you have for now, so DO NOT lose it. By the same token, do not become so afraid of risk that you abandon your long-term investment goals because of a short-term problem.
Second, stay away from the credit cards. If you can pay your balance in full at the end of every month, that's fine, but do not cover your expenses by carrying a balance. Granted, carrying a balance is preferable to starving, but credit card debt is a classic way of turning a small, containable problem into a decade-swallowing financial oubliette.
Last and not least, stay away from the retirement savings as long as you can. If you tap into advantaged or shielded accounts like IRAs or 401(k)'s, you will not only have a tax bill to pay, but a penalty on top of it. Paying these costs is arguably incrementally better than diving into credit card debt purgatory, but this should only be considered as a last resort.
The Bottom Line
Losing a job is usually a pretty terrible thing, but if you approach it in a calm and realistic manner you can use your portfolio to smooth over the worst of it and keep yourself on a reasonable financial footing in the interim. Be sure to be careful about risk and be prudent about expenses, but don't allow worries about your financial present keep you from actively looking for the next job and better securing your financial future.
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