liquidity needs

Rule #3

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Our Fundamental Rule #3 of Investing: own the orchard for the fruit crop. What do we mean?

If the fruit crop is enough to live on, you would not have to care what the neighbor would pay for the orchard – it’s not for sale! Whether the latest bid was higher or lower than the day before makes no difference.

You can think of your long term portfolio the same way. If it produces the cash flow you need, fluctuating values don’t always affect your real life – you buy groceries with the income, not with the statement value. The down years may have no impact on your life or lifestyle. All we need to know is where to find the cash you need, when you need it, to do the things you want and need to do.

This is what we mean when we say “own the orchard for the fruit crop.” It’s important, because enduring volatility is an inherent part of investing for total return.

There are two key points of caution. This approach presumes you keep the faith that downturns in the market end someday, that the economy recovers from whatever ails it—and you do not sell out at low points. Also, it assumes that your short term lump sum cash needs are covered by savings that do not fluctuate.

Clients, this understanding is key to our work. Please call or email us if you would like to talk about it, or anything else.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Icky-Tasting Medicine

© Can Stock Photo / dolgachov

If you believe that living with ups and downs is an integral feature of long term investing, some aspects of customary investment practices seem rather curious.

The idea that volatility is risk is the root of the trouble, in our view. We believe volatility is simply the normal ups and downs, not a good measure of risk. A widely followed concept, Modern Portfolio Theory or MPT, adopts the approach that volatility is literally, mathematically, risk.

This approach attempts to work out “risk tolerance,” by which they mean willingness to endure volatility. If one is averse to volatility, then portfolios are designed with volatility reduction in mind.

Unfortunately, volatility reduction may result in performance reduction. But investments which do not fluctuate are not truly investments. Your bank account does not fluctuate, but it is not an investment.

We think beginning the conversation with an attempt to tease out willingness to endure volatility is a lot like a doctor working with a child to determine tolerance for icky-tasting medicine before making a prescription.

Our strategy is to impart what we believe about investing. We work with people to understand what part of their wealth might be invested for the long term, and whether they are comfortable with ups and downs on that fraction of it.

This necessarily involves learning about near and intermediate cash needs and income requirements, as well as talking about what it takes to live with the ups and downs. We invest a lot of time and energy into providing context and perspective so people might be better able to invest effectively. This process begins at the very beginning of our discussions with potential clients.

Clients, if you would like to talk about this or anything else, please email us or call.


All investing involves risk including loss of principal. No strategy assures success or protects against loss.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Case Study: The Looming Retirement of Mr. & Mrs. C

© Can Stock Photo / lucidwaters

We recently were consulted by folks who are just a few years from retirement. Mr. and Mrs. C had a chance to make a major purchase that they had long considered and would really enjoy. Some people want a camper or a boat, others a cabin…you get the picture. They wanted our help to figure out if it would fit with the rest of their plans and planning.

The process we used to help them is the same framework we use to help people understand how retirement will work for them, financially speaking. Perhaps it will be of interest to you.

There are four kinds of numbers that figure in.

  1. Monthly outgo—how much will it take to run the household in retirement, to live as you plan to live?
  2. Monthly income—what are the pieces of recurring monthly income? Monthly pension benefits, Social Security, and rental income are in this category.
  3. Planned lump sum purchases or obligations to pay. This was the thing that stumped Mr. & Mrs. C. They had a chance to lay out some money that could improve their lives a lot, and needed to know whether it would work out.
  4. Lump sum resources available. Long term savings, 401(k) plans, IRA’s, investments, and money from planned sales of assets are the main categories here.

Fortunately, Mr. & Mrs. C have expected retirement income sources that should sustain their lifestyle in retirement. Once that was determined, we could move on to sorting out the best way to handle the purchase they planned.

There are tax considerations to withdrawing retirement plan dollars, cash flow considerations from taking on debt, and opportunity costs to cashing in investments. We framed the costs and benefits of each alternative so they could figure out what they wanted to do. If you would like to talk about your situation, please call or email us to set a time for discussion.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.