THE ULTIMATE LIQUIDITY PORTFOLIO
It’s become a personal finance gospel:
“Keep 6 months of living expenses in an emergency fund, and invest it in either a high yield savings account or a money market fund”.
Standard advice for years, to which I say… "bollocks!”. There is a better way: my Ultimate Liquidity Portfolio, or “ULP”.
In my decades of investing, I’ve learned from some of the greatest minds in the business – I studied economics with Paul Krugman at Stanford, did investment research at Goldman Sachs, received an MBA with high distinction from the Harvard Business School, and worked with Ray Dalio at Bridgewater.
The ULP is the best liquid strategy I’ve ever seen. It’s simple, easy to implement, and has over 46 years of data backing it up. The tax-efficient strategy has performed in markets of all stripes – from full-blown panics to massive economic booms. If you want yield, growth, and an alternative to the meager returns banks have been paying you, you can learn more by clicking below.
What is the ULP
In its simplest form, the ULP is 88% US intermediate term treasuries, and 12% Total US Stock Market, rebalanced once per year.
How has it performed over time?
Over the last 46 years, the 88/12 solution:
- Has provided about 3% additional real return per year vs. cash (3.7% above inflation vs. 0.7%)
- Is 20%-30% more likely to preserve value vs. cash over time periods ranging from 1 month to 3 years. In fact, it is also either more or equally likely to preserve value vs. stocks over a range of time periods.
- Provides these benefits for minimal “risk” – over the last 46 years, in a downside (15thpercentile) scenario, a $10,000 investment in cash would have been worth $9,834 at the end of one bad year. A $10,000 investment in the ULP would be worth $9,694 at the end of one bad year. By comparison, a $10,000 investment in stocks would be worth $8,846 at the end of one bad year.
Vs. Cash For an additional downside risk of $140, you gain 3% additional return.
To get the next ~3% of additional return from stocks, you risk an additional $847, or more than 6x the amount.
But isn’t it risky to have stocks in an emergency fund portfolio?
Because of the interplay between these unique bonds and the stock market, adding a 12% total stock market allocation actually DECREASES the risk of the portfolio. Although counterintuitive, significant changes in stock exposure (up OR down) create a worse risk/reward scenario. As a simple example, 100% intermediate-term bonds have lower returns (about 0.5% per year), a lower win rate across all scenarios, and more downside than the 88/12 solution.
You can learn more about this in my book.
Tax advantages of the ULP vs. savings accounts
The ULP has significant tax advantages over savings accounts. Interest payments on savings accounts are fully taxable at the state and federal level. If you live in California that might mean a hypothetical $10,000 savings account earning 2% ($200 interest), you’d pay over $100 of taxes per year, wiping more than 1% off of your returns. Forget keeping up with inflation when the government is taking half of your money away from you.
By contrast, earning the same 2% in the ULP, you’d pay a maximum of $74 or in taxes – a savings of at least 0.25% thanks to federal tax rules that exempt fed bonds from state taxes and have advantages for dividend income from stocks.
Other considerations 1 – Federal backing for 88% of your money
88% of the ULP is backed by the full faith and credit of the US government, with no maximum limit. FDIC savings accounts are 100% “backed by the full faith and credit of the US government”, up to $250,000 – beyond that, 0% is covered. Because banks have an idiosyncratic risk, FDIC insurance is used with some frequency. Note: Money market funds are NOT FDIC Insured. This is an important caveat – some people reach for an additional few basis points of return over savings accounts by having their money in money market funds – but if things go badly – you have no means to get your money back.
Note: it is VERY important to select the right funds or ETFs for this strategy – especially the bond fund. Small differences in the composition of these funds can significantly impair your performance. To see which funds I recommend funds in, download the first two chapters of my book, for free, here.
GET STARTED WITH MY FREE GUIDE:
'How To Implement the ULP in 4 Simple Steps'
WHO AM I?
In my decades of investing, I’ve learned from some of the greatest minds in the business – I studied economics with Paul Krugman at Stanford, did investment research at Goldman Sachs, received an MBA with high distinction from the Harvard Business School, and worked with Ray Dalio at Bridgewater.
The ULP is the best liquid strategy I’ve ever seen. It’s simple, easy to implement, and has over 46 years of data backing it up. The tax-efficient strategy has performed in markets of all stripes – from full-blown panics to massive economic booms. If you want yield, growth, and an alternative to the meager returns banks have been paying you, you can learn more by clicking below.
Happy Investing,
Chris
BUY MY BOOK:
'The Ultimate Liquidity Portfolio'
WHAT YOU'LL LEARN:
- Say goodbye to the six-month rule. Use our questionnaire/calculator and figure out YOUR target emergency fund amount.
- Investing for the longer term... Balancing ULP with your long-term investments
- What savings accounts should be used for: yes they still have a place (but don't overdo it)
- Gold, guns, cash, and crops... how do you define "emergency"?
- Picking your ULP funds…how the right “sounding” index funds can dramatically undermine your performance
- Hyperinflation, depressions, and more... How the ULP performs when the world looks really scary or really great
- The philosophy of the ULP and human behavior: why we choose low correlation, real returns, drawdown resiliency, and liquidity
- Stocks are riskier than bonds... Except when they're in a portfolio... the data and reasons why it's safer to include stocks.
- Advanced ULP... portfolio tweaks for even better risk-adjusted returns
- Taxes: some simple (and some complicated) strategies for reducing them
- The past does not equal the future…. why returns on everything are getting worse...and what to do about it
- How to take money out when the emergency need hits
- ULP over your life.. How things change as you age and why
- Federal guarantees: comparing ULP vs. the alternatives, is more return worth it for you?
FREE GUIDE:
'How To Implement the ULP in 4 Simple Steps'