Building Your Cashflow Ladder

In the previous post, we looked at why you need to have a cashflow ladder. Now, we look in detail at WHAT you should do, and when.

Two Years in Cash

There has been quite a bit of research from various quarters about how long it takes for a portfolio to get back ‘above water’ after a market decline. Obviously there are lots of variables here, not least the makeup of the portfolio.

My sponsors 7IM tested their own portfolios and found that a Balanced portfolio (roughly 50:50 equities and then bonds and other stuff) recovered within 12 months 87% of the time, and within 24 months 97% of the time.

For a more growth portfolio, roughly a 70:30 split, the figures were a recovery within 12 months 81% of the time, and within 24 months, 95% of times. So the logic is that holding two years of your withdrawals in cash should mean that in all except the rarest cases, you shouldn’t need to draw from your invested pot while it is down.

Years Three to Five

3-5 years is definitely on the short side of an acceptable investing timeline, so if you are going to be investing money that you will need in this timescale, you should err on the safer side of your risk profile.

I am going to stop short of suggesting asset allocations, because that would be too far over the other side of the line called advice. I’m not going to say “you should keep no more than X% in equities” because there is no hard and fast rule here and I could get into trouble.

If we accept the fact that equities are the primary growth engine and also the main driver of volatility in portfolios, then it follows that to keep volatility and the depth of portfolio drops to a minimum, you’ll want to temper your equity exposure.

Years Six to 10

This is mid-range investing and as such can be done in line with your standard attitude to risk. So if you’re a balanced investor, you can build a balanced portfolio and it should be fine, because you know it’s going to run for at least five years.

Years 11+

Given this is so far out, you can definitely afford to ratchet things up a bit here, so maybe build a portfolio for this rung of the ladder which is a notch or two above how you would normally invest. If you’re a balanced investor, you could take that up to a moderately adventurous portfolio.

Note that this is independent of tax wrapper, so you could have elements of each rung of the ladder in both your pension and your ISA, for example. You can achieve this using sub-accounts if your platform allows you to have different segregated pots within your pension, say. Or an easier way would be to achieve this with funds.

The idea then is that once a year you reassess the makeup of your portfolio in line with a) the prevailing market conditions, and b) the fact that you’re a year further on. Money essentially moves down the ladder and closer to you as you need to spend it.

As I recorded the episode this post is based on, the markets were volatile due to the impact of the coronavirus outbreak, but I got loads of emails and posts in the Facebook group where people said that they were sanguine about the volatility because they didn’t need to access the money yet.

And that’s a crucial point. Using the ladder, you know that you shouldn’t need to access invested money for at least two years because you have that in cash. Make sense? You can let the markets recover, which they nearly always do, within two years anyway. Let's move on.