Bond ladders help to manage interest rate and market risk, putting capital preservation ahead of return potential. (UBS)

Historically, well-diversified balanced portfolios have fully recovered their losses within 3-5 years, even after a serious bear market decline. We therefore recommend implementing a Liquidity strategy to help you maintain your lifestyle regardless of short-term market disruption. Liquidity strategies are built using two components:

1. A core bond ladder designed to meet spending needs.

A bond ladder—a series of bonds with staggered maturities over the next 3-5 years (the size of your Liquidity strategy should reflect your Longevity strategy’s expected time to recover)—works by aligning the size and duration of individual bonds with the amount and timing of your planned withdrawals. Bond ladders also help to manage interest rate and market risk, putting capital preservation ahead of return potential. Bond ladders are at the heart of the Liquidity strategy because they help investors to embrace an institutional approach known as “liability matching.” We recommend using bond ladders for funds that are earmarked for spending that is known in terms of size and timing.

2. A “Three Tier” satellite approach to help enhance your portfolio's return potential.

As a complement to the core bond ladder approach, we recommend using a series of satellite strategies to help you meet spending needs that are uncertain in exact size and timing:

Tier I (Everyday cash): Cash earmarked for day-to-day expenses, or as an emergency fund (6–12 months of spending for “rainy day” needs). Because of the immediacy of these needs, investors should plan for a very short holding period for these funds.

Tier I solutions should minimize market, liquidity, and credit/counterparty risks.

Tier II (Savings cash): Funds that are needed for known expenses in the near future, but not immediately.

With Tier II solutions, investors can afford to take on a very small amount of market and liquidity risk, but strictly limit credit and counterparty risks.

Tier III (Investment cash): Investments dedicated to finance medium-term spending (generally, years 3-5).

Tier III solutions are the broadest category, with a variety of market, liquidity, and credit risk characteristics.

Together, this “Core-Satellite” approach offers balance while also allowing you to take advantage of yield pickup opportunities based on the “patience” of the dollars in your portfolio. We recommend refilling your Liquidity strategy annually during bull markets. During bear markets (such as the one we are experiencing now), we recommend using your Liquidity strategy reserves to fund your spending; this will help to give your Longevity strategy assets time to recover before you tap into them for a Liquidity strategy refill.

Reach out to your financial advisor for more information.