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.