Liquidity, like two sides of a coin, can be viewed from two perspectives. On one side is a family’s need for liquidity, like a car purchase, home purchase, or college funding. These are usually either short- or medium-term needs. The opposite side of the coin is where one can give up liquidity to capture additional returns. This is mostly a long-term decision. Managing short-term liquidity requires the underlying investment choice to protect the capital so that it’s available when you need it. When liquidity is not needed for a portion of the portfolio, you provide it to someone else who needs it, and in exchange seek higher investment returns. The simplest form of trading off liquidity for higher returns is investing in a 5-year CD versus a 1-year CD. 

Liquidity needs can be short-term (a few months), like an imminent car purchase, or medium-term (a couple of years), like a home remodel. It is unproductive to plan for liquidity beyond 5 years, although there may be extenuating circumstances that make this necessary. On the other hand, recognizing what assets can be parked in less liquid investments can be a smart move, as these assets can compound at higher rates of return for longer periods of time.

Product Selection Is Key

Product selection is the key to managing liquidity capital. There is a continuum from checking accounts, savings accounts, money market investments, and 1- to 5-year certificates of deposit (CDs) that provide varying rates of return. In addition, insurance products like Multi-Year Guarantee Annuities (MYGAs) can provide both tax deferral and slightly higher rates of return. Treasury bills and bonds, either bought directly or in ETF wrappers, are also excellent choices for capital that might be needed quickly. Ultra short-term bond ETFs can be useful during a period of rising interest rates, like we had in 2022, but may suffer small drawdowns during adverse market conditions. 

On the other side, giving up liquidity in exchange for higher returns often involves investing in private markets, which can be an excellent choice for a part of the overall portfolio. Private credit and private real estate investments can provide slightly higher rates of return compared to their public peers, partly because these are not liquid on a daily basis. Going further in this continuum, private equity and venture capital target substantially higher rates of return but carry additional risks, including longer lock-up periods.

Putting all this together, one can utilize the following solutions to manage liquidity.

Short-Term Liquidity (3 to 12 Months) 

  1. Bank accounts: Savings and high-yield savings accounts
  2. Treasury bill ETFs  
  3. Ultra short-term bond ETFs: These are highly liquid, and money can be withdrawn within a day. In the current monetary environment, these investments are offering a healthy 5+% yield.

Medium-Term Liquidity (2 to 5 Years)

  1. Laddered certificates of deposit (CDs): A laddered series of CDs maturing each year is a good solution when the liquidity need is precisely known. 
  2. MYGAs: For investors over the age of 59½, a CD-like instrument is purchased from an insurance company and benefits from higher rates of return as well as tax deferral.
  3. Short-term bond funds and ETFs: These can be utilized for medium-term liquidity needs, but it is important to utilize high-credit, quality vehicles with a duration between 2-3 years to shield capital and provide reasonable rates of return. 

Enhancing Returns Using Less Liquid Investments 

For investors who are willing to give up liquidity in an attempt to capture additional returns from illiquid investments, there are two approaches based on their risk tolerance:

  1. Private credit
  2. Private real estate

For more aggressive investors, the following asset classes can be utilized to aim for higher total returns:

  1. Private equity
  2. Venture capital

What’s Right for YOU?

Remember that the allocation of assets in your portfolio should be based on your individual financial situation, risk tolerance, and investment goals. It’s essential to periodically review and adjust your strategy as your needs change over time. Consulting with a knowledgeable financial advisor can also be beneficial in crafting a tailored investment plan to meet your specific liquidity needs.

We at Everest Management Corp can help you gain clarity around your portfolio; and as fiduciaries, you can trust that we’ll put your interests first, always. Schedule an introductory, no-obligation meeting by contacting us at 408-502-6015 or emc@everest-mgmt.com.

About Ranga

Ranga Srinivasan is co-founder and principal at Everest Management Corp., an SEC-registered wealth advisory firm based in Silicon Valley and serving clients across the United States. After graduating from the University of Cincinnati in the field of engineering, Ranga, witnessed the dot-com collapse in the early 2000s and sought to manage his own personal finances. He realized that many of the options available were unsatisfactory for a myriad of reasons. Knowing it could be done better, Everest was founded in 2007 to provide comprehensive wealth management. Ranga and the Everest team are dedicated to caring for the financial needs of the families they serve. With an emphasis on building trust and holding to the fiduciary standard of putting clients first, Ranga strives to offer financial solutions that inspire confidence. 

In his free time, Ranga is passionate about staying active; you can often find him swimming, golfing, biking, and playing tennis. He also has a great love for charity and philanthropy work. To learn more about Ranga, connect with him on LinkedIn.

About Ramprasad

Ramprasad Satagopan is co-founder and principal at Everest Management Corp., an SEC-registered wealth advisory firm based in Silicon Valley and serving clients across the United States. As a self-made, highly educated first-generation immigrant, Ramprasad became passionate about investing after witnessing the dot-com collapse in the early 2000s. He created Everest to help his peer engineering community to build household wealth in a systematic way. Everest has grown over the years while staying true to its fiduciary commitment. Ramprasad and the Everest team take pride in being a firm that brings a reputable, honest, and caring approach to all its clients.

Ramprasad graduated from both the University of Cincinnati and the University of Phoenix with a master’s degree in science and business administration, respectively. When he’s not helping families build a strong financial future, Ramprasad can be found enjoying traveling and reading. To learn more about Ramprasad, connect with him on LinkedIn.

Disclosures

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These views may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Investing in REITs involves certain distinct risks in addition to those risks associated with investing in the real estate industry in general. Equity REITs may be affected by changes in the value of the underlying property owned by the REITs, while mortgage REITs may be affected by the quality of credit extended. REITs are subject to heavy cash flow dependency, default by borrowers and self-liquidation. REITs, especially mortgage REITs, are also subject to interest rate risk (i.e., as interest rates rise, the value of the REIT may decline).

No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. The principal risks of Everest Management Corp. strategies are disclosed in the publicly available Form ADV Part 2A. 

Everest Management Corp. is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Everest Management Corp. and its representatives are properly licensed or exempt from licensure.