Here we are in a bear market, and over and over, you've seen how it's a great opportunity to buy dividend-yield monsters like Bank of America (NYSE:BAC) and deep-moat leaders like sunglasses king Luxottica (NYSE:LUX) at bargain prices. It's good stuff -- if you're into that sort of thing.

But what if you're not buying stocks these days? What if you're in retirement, or getting close? What if you need income, not new stocks to buy?

If so, then depressed stock prices might actually be a problem for you. You might well need to use your money soon -- whether prices have recovered or not.

If that's you, then you need a different answer from the ones we give to the folks with longer time horizons. You need... the Comfy Cushion.

You were expecting... something else?
No, it's not something out of an old Monty Python sketch. The Comfy Cushion is a nickname for a simple but clever strategy for managing short-term market risk while keeping most of your portfolio invested in stocks.

While some financial planners will tell you to get entirely out of stocks once you're retired, I think just about everyone with an investment horizon of more than five to seven years should own some stocks. Maybe not the high-flying growth stocks you owned when you were younger and more carefree, but stocks nonetheless -- ideally, with dividends.

Consider: The last 10 years was a lousy time for large-cap stocks as a class, historically speaking. But look at how these big boring dividend stocks did versus a (very good) Treasury money market fund over that period:


Average Annual Percentage Return

Value of $10,000 invested on August 28, 1998

Altria (NYSE:MO)



Chevron (NYSE:CVX)






Prologis (NYSE:PLD)



Carnival (NYSE:CCL)



Vanguard Treasury Money Market Fund (VMPXX)



Source: Yahoo Finance, Vanguard. Adjusted for dividends.

See what I mean? Wouldn't it be nice to harness those returns without risking next month's grocery money? That's what the Comfy Cushion is about.

The strategy's nickname, by the way, comes from a wonderful article written by Fool David Braze, a retired financial planner and all-around fount of retirement wisdom. It appeared in the February 2007 issue of the Fool's Rule Your Retirement newsletter, and it lays out David's firsthand experience with the strategy in great detail.

While you should definitely read David's full article to get the complete walk-through -- no need to pay, just grab a free trial to get access -- the essence of the approach is simple enough to describe here.

The inner secrets of the Comfy Cushion
The short explanation, as you've probably guessed by now, is that you'll take the money you anticipate needing in the near term out of stocks and park it somewhere less volatile. That's the cushion. Done right, this allows you to keep the bulk of your money in stocks well into retirement without losing too much sleep over Mr. Market's mood swings. At the same time, you'll ensure that the money you'll need in the near future -- y'know, to live on -- is safe and sound.

Here are the steps to creating your cushion. While they might look simple, hang on -- the devil is in the details.

  • Raise enough cash to cover five years' worth of expenses;
  • Put a year's worth in a money market fund;
  • Put the remainder in higher-yielding but still conservative investments like intermediate-term bonds;
  • Rebalance every 6 months or so or as market conditions warrant.

Pretty simple, no? Here are some common questions:

  • How do I know how much income I can safely take in a year? The usual answer is "4%" -- but see David Braze's article for a fuller explanation.
  • How do I know when "market conditions warrant"? You won't, always. But you don't have to sell down on a perfectly balanced schedule -- sell more when prices are up, sell no more than necessary during bearish periods (like this one).
  • How do I get started now, when stock prices are down? Like I said above, don't try to raise five years' worth right now. Let the market recover first. Meanwhile, think about alternative ways to build your cushion or generate the income you'll need over the near term -- consider taking dividends in cash instead of reinvesting, for instance.

Have other questions? Want a walk-through with an expert? Check out David Braze's article for the complete scoop. Full access -- to the February 2007 issue with that article along with everything else, including a members-only discussion board where you can ask any other questions -- is yours free for 30 days.

Fool contributor John Rosevear has no position in any of the companies mentioned. Luxottica is a Motley Fool Global Gains selection. Bank of America is a Motley Fool Income Investor pick. 3M is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters free for 30 days. The Fool's disclosure policy never expected the Spanish Inquisition.