education | savings strategies
Using Liquidity to Optimize Your Long-Term Savings Plan
By David James Tellock
You've proved you can build wealth. It's time to preserve that wealth and optimize your liquid savings.
There are many reasons to stay focused on building your wealth. For example, technological innovation is transforming the workplace and retirement should always be top of mind. Additionally, due to the inevitable ups and downs in the financial markets, the future can pose challenges to your savings plan. Thanks to the relative security of liquid savings, it makes sense to prioritize liquidity in your asset portfolio.
The need to optimize your savings doesn't simply mean maintaining the status quo by only investing in stocks and bonds. It means sticking with a strategy designed with your future in mind. As most money managers recognize, the key to long-term success is having a portfolio that strikes the right balance between growth and safety.
Strategies for Maximizing Your Long-Term Edge
This isn't always easy, of course. Nowadays, you have many options to choose from, including equities, fixed income, real estate, commodities, certificates of deposit (CDs) and high-yield savings accounts. According to Capgemini's World Wealth Report 2019, high-net-worth individuals globally had approximately 28% of their assets in cash and cash equivalents, 26% in equities, 18% in fixed income, 16% in real estate and the remaining balance in other investments last year.
Naturally, you rely on certain criteria — risk, return and liquidity — to decide among the options. However, there's more to it than that. Like institutional investors, you understand that other strategies can boost the odds of achieving long-term goals. Here are three methods to consider.
1. Diversify Your Portfolio Beyond a Mutual Fund Allocation
Nobel Prize-winning economist Harry Markowitz once called this approach the only "free lunch" in investing, but it's about more than varying holdings in a few asset classes. Allocating capital to an array of savings and investment products — including cash and cash-equivalent liquid savings options — can help you grow and preserve wealth in an uncertain world. Diversification can minimize the risk of loss, open up opportunities to enhance returns, safeguard your assets against adverse market cycles and reduce portfolio volatility.
2. Find Cornerstones of Safety
In a world where financial advisers have long recommended favoring equities over other investments, it may be a surprise to some that high-net-worth individuals also consider other tried-and-true methods. They tend to allocate the largest share of their wealth to their "cornerstones of safety." This can include a cash-equivalent asset class comprised of guaranteed government obligations, savings accounts and even CDs. In particular, there are new CD products worth considering that range from fixed-term CDs, bump-up and step-up CDs offering flexible interest rates, CDs indexed to stocks or other investments, no-penalty CDs and CD ladders.
3. Seek Options Offering Secure Flexibility
Regardless of the specifics, cash and cash-equivalent assets are a core holding of high-net-worth individuals. Perhaps this reflects the fact that, as investment advisory firm Cambridge Associates has noted, safe havens "can provide portfolio ballast during periods of market turbulence." But that's not all. A study by MagnifyMoney found that six-month CDs outperformed equities 30% of the time from 1967 to 2017. By investing in, say, an 11-month liquid CD featuring a fixed rate of interest, various payment options and no early withdrawal penalty, it's possible to have safety and flexibility. This liquidity also allows you to effectively balance your portfolio, as you'll be better positioned to access funds and take advantage of unique buying opportunities when they arise.
The Upside of Using Liquidity to Lower Your Risk
To be sure, flexibility has its downside. Seasoned money managers have long recognized that a disciplined investing approach can help them avoid making costly missteps. After amassing a great deal of liquid savings, you want to see that amount continue to grow. Taking on risk can lead to sizable rewards, but it's often best to find a balance that allows your money to build over time.
With this in mind, a fixed-term CD can make it easier to stick with a strategy aimed at growing liquid savings and achieving long-term financial security. In some cases, a CD ladder could work even better — it can unlock access to longer-term rates, increase fund availability and even help mitigate the impact that rising inflation can have on a portfolio.
Inflation is not the only threat that can wreak havoc with an unbalanced portfolio, though. For instance, while many believe that equities offer the most upside, this asset class is also exposed to a variety of investment risks. The same holds true for fixed income, real estate, commodities and alternative assets. Liquid assets are protected from this sort of volatility.
In the case of FDIC-insured CDs, the biggest worry seems to be early redemption risk. Of course, if you're not thinking long-term, paying a "penalty" to get your money back can be hard to swallow. But even then, there's a good chance you'll end up better off than if you had invested in a traditional savings account. There are also "no penalty CD" options to consider, which allow you to withdraw the funds without paying a fee.
In sum, now that you've built a solid base of liquid savings, you need to remain focused on securing your future. While there are many options to choose from, the key is striking the right balance between safety and growth. When you follow these long-term strategies with your financial future in mind, that's not hard to do.