Maintaining liquidity within investment portfolios

Doug Horn

The phrase, “Cash is king” is often used regarding investments. Generally, this is used when the markets are volatile and thus the value held in cash is not falling like other segments of a portfolio. Having cash in the portfolio also creates flexibility to take advantage of sudden price drops in the market or particular stocks. However, cash is not the only way to create or maintain liquidity. Liquidity is the ability to convert a holding to cash with minimal loss due to fees or charges and relatively quickly.

The question could be raised as to why it is important to have liquidity within the portfolio? The easiest answer is, “It sometimes rains on your parade, and cash is needed to solve the problem.” It seems this is still something many investors forget, and some advisors fail to consider.

Only recently, I was having a conversation with a prospective investor and answering their questions regarding a recommendation made by another advisor. The investor had explained they were semi-retired and currently did not rely upon the investments for income. Also, they were conservative but would like to be able to pull the earnings from the investments in the future.

The recommendation from the other advisor was to take all of the investments and roll them into a new annuity product offering a guarantee. This recommendation did meet the conservative investment objective, but actually raised several other concerns. Fortunately the investor had doubts about this recommendation, although past service had not been an issue. Upon review of the materials, the product was an equity index annuity with a ten year surrender period. This meant all of the investors liquid assets were being recommended to go into this product, and thus only limited funds would be available for withdrawal for the next ten years. As with most annuities, ten percent of the contribution could be withdrawn free of penalties; but, it appears if those funds were taken out anytime other than the contract anniversary, any earnings on the amount withdrawn would be forfeited.

Equity index annuities (EIA) can be beneficial, but they must be managed; and unfortunately, too many have very high commissions and long surrender periods with high surrender fees. For seniors, I am concerned with their ability to reach assets in the event they need to pay for long term care. I could not tell if this product would permit withdrawals without surrender fees in the event the investor needed long term care. Many EIA products do not offer any exemptions regarding withdrawals, thus investment funds must be allocated to other products where there would be little or no fees to convert back to cash.

For seniors, the need for cash can arise for many reasons, whether it is for their own healthcare or their spouse’s, or perhaps the desire to assist one of their children. It could also be caused by an accident or the need to purchase a new vehicle or other substantial asset. As I said early, occasionally it just rains on your parade. Making sure a minimum of one fourth of the investments is liquid (convertible to cash quickly with minimal fees/costs) to as much as sixty percent is not out of the ordinary for seniors.

In this case, the long surrender period and most likely high surrender fees made the EIA a questionable solution for this investor. It was also unclear whether the other advisor would stay in touch and actually manage the EIA, since these products’ investment allocations should be reviewed and potentially adjusted each year on the contract anniversary.

For this case, another issue was discovered which made this recommendation appear to be more favorable to the other advisor than to the investor. Approximately seventy-five percent of the investor’s funds were still subject to surrender fees from the products they were already invested. Had they moved forwarded, it appeared they would have lost approximately seven percent of their current holdings to surrender fees and then become subject to a new ten year surrender period.

Understanding and knowing the costs to move out of existing products is just as important as to know the costs and new limitations of the new products. And most importantly, making sure sufficient liquidity is maintained, so when cash is needed it can be obtained quickly and without high costs.

For assistance with portfolio allocations, insurance, estate planning, or investment management contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools

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