With the recent market turbulence and events in Japan and Libya, you've seen an increase in client concerns as to what it means for their assets. Even the most conservative investors grow uneasy in this type of climate.

So what can we do as advisors to protect our client's assets (and their sanity)? I found the answer lies in the concept of compartmentalizing assets.

Before I get to a discussion of the three client buckets, it is imperative to establish a game plan consistent with their needs, and emphasize the importance of adhering to it. Although clients hire you to take the burden off their shoulders, I've always felt the best relationships are those in which the client understands what we are doing and why.

Once the plan is in place, we are ready to discuss the buckets.

Short-term funds for current and near-term needs are typically made up of cash and short term fixed income holdings which are liquid and easily accessible. I think that liquidity is a misunderstood term and it is important to take a moment and clarify it: Liquidity refers to the ability of an investment to be converted to cash with little or no affect on its price. We have recently learned some tough lessons regarding investments marketed as liquid. Many of these in fact, were very risky, such as the auction rate preferred securities. The short-term bucket is not intended to be a performance enhancer. Money markets and Treasury bills fit into this bucket and serve to avoid risk.

Mid-term funds, those intended for a three to seven year time horizon, can include more diverse holdings, including intermediate fixed income and equities, as the longer time horizon affords the ability to withstand some volatility.

Long-term funds, those expected to be held for more than seven years, can include equity-based investments, real estate, and commodities. These holdings are inherently more risky and volatile. It really doesn't matter what the value of this bucket is next week or next month, as the client needs to know what it will look like in eight to 10 years. I frequently suggest that clients transfer the risks of uncertainty and loss of principal to insurance companies. I recommend annuities with income guarantees that offer market participation with great predictability of future income.

When clients start to panic about the market and request immediate changes, I remind them of the objective of each of their buckets. If the short-term bucket is invested correctly, there should be little impact on it. The mid- and long-term buckets will experience some movement, but they are not ready to be tapped. The percentage change in value of the long-term bucket will be greatest in the short-term, but over time it decreases.

As advisors, we need to be diligent about appropriately recommending investments for, and accurately assigning funds to, each client's short-, mid-, and long-term compartments in order to appropriately manage within and adhere to each individual's risk profile.