Market volatility is uncomfortable, but one of the more damaging things that can happen to a long-term financial plan is selling at the wrong time because of it. The way we address that is through structure, not willpower.
Start with a Cash Buffer
One of the first things we do when building a portfolio is set aside six to nine months, sometimes a full year's worth, of cash or safer short-term investments. This might mean a money market fund, treasury bills, or other fixed-income instruments. The goal is liquidity. If we go through a period of volatility, we want to be well prepared so the invested portion of the portfolio can go through its natural ups and downs without forcing anyone into a difficult decision.
Why It Works
That cash reserve can also help give the client clarity and confidence. Knowing that the next several months of cash flow are covered, regardless of what markets are doing, allows us to remain invested even during more volatile stretches and helps avoid selling at inopportune times. That's a very important part of the process, and one we take seriously with every client.
It Also Changes the Risk Conversation
We work with a lot of clients who come in thinking they should be more conservatively invested, especially in or approaching retirement. By setting up that bucket strategy and having cash flow set aside, they can tend to feel more comfortable when we suggest that they should really be thinking about taking a little more risk than they initially assumed. The reserved cash isn't just a safety net. It's what makes the rest of the portfolio manageable.
The Longer-Term Goal
The thinking behind all of this comes down to maintaining purchasing power, continuing to grow the portfolio over time, and making sure clients never feel like they're running out of money. We've seen this approach work well, and it's something we genuinely believe in.
If you'd like to talk through how your portfolio is currently structured for periods like this, we're happy to have that conversation. Reach out at www.vanleeuwenco.com to schedule a complimentary consultation.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
An investment in a Money Market Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
No strategy assures success or protects against loss.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.