Latest Business News
## Boosting Cash Flow in Your Fixed Income Portfolio
With interest rates reaching their peak, it is a favorable time to enhance the cash flow generated in your fixed income portfolio. UBS has developed a framework that allows investors to tailor their asset allocation based on three main objectives: liquidity, longevity, and legacy. By focusing on the liquidity portion of the plan, investors can meet immediate cash flow needs while still allowing long-term assets to appreciate.
### Liquidity: Meet Immediate Cash Flow Needs
To ensure immediate cash flow needs are met, UBS recommends a core-satellite approach. In the "core" part of your portfolio, you can build a ladder of bonds with different maturities. This strategy helps to meet expenses with known amounts and specific timing. By staggering the maturities of these bonds, investors can avoid timing the market and spread out interest rate risk. Bonds typically pay interest twice a year, providing a steady income stream.
### The Satellite Strategy: Planning for Unexpected Spending
The "satellite" portion of the strategy focuses on planning for unexpected spending needs. UBS suggests using three tiers for this purpose.
The first tier is "everyday cash," which involves keeping readily accessible funds for immediate withdrawal if needed. Online banks, such as Bread Financial, offer competitive yields on savings accounts, with an annual percentage yield of 4.9%.
The second tier is "savings cash," where money can be locked up for a short period of time. Fixed-term deposits or money market certificates may be appropriate for this tier, as they offer higher yields in exchange for sacrificing some liquidity. For example, Bread Financial and LendingClub offer APYs above 5% on 1-year certificates of deposit.
The third tier is "investment cash," which represents funds with a three- to five-year investment horizon. UBS suggests considering short-term corporate bonds from highly-rated issuers or select structured products with capital preservation characteristics. Investors may find exchange-traded funds (ETFs), such as Vanguard Short-Term Corporate Bond ETF (VCSH) or SPDR Portfolio Short-term Corporate Bond ETF (SPSB), suitable for this tier.
By following this liquidity-focused approach, investors can increase the return potential of their long-term investments while minimizing impulsive investment decisions during periods of market volatility. It is crucial to align your asset allocation with your cash flow needs and investment timeline.
## Conclusion: Strategic Cash Flow Management for New Businesses
In today's competitive business landscape, managing cash flow effectively is crucial for the success and sustainability of any new business. The strategies discussed in this article, originally tailored for fixed-income portfolio management, can also offer valuable insights for entrepreneurs.
By adopting a liquidity-focused approach, new businesses can optimize their cash flow to meet both immediate and unexpected spending needs, while still allowing for long-term growth and investment.
Implementing a core-satellite approach can provide stability and certainty in meeting immediate cash flow requirements. Building a "core" portion of the cash flow portfolio can involve setting aside funds for known expenses, using a ladder of bonds with different maturities. This strategy enables businesses to have a steady income stream, reducing dependency on external financing or credit in times of need.
Additionally, the "satellite" strategy, which accounts for unexpected spending, allows businesses to have readily available funds at different tiers. Keeping cash in easily accessible accounts, such as high-yield savings accounts from online banks, can cater to everyday cash needs. For money that can be locked up for a short period, considering fixed-term deposits or money market certificates with higher yields can be advantageous. Moreover, investment cash with a longer investment horizon can be allocated to short-term corporate bonds or ETFs.
By aligning cash flow needs with investment strategies, new businesses can optimize their financial standing, reduce uncertainties, and avoid impulsive decision-making during market volatility. This comprehensive approach provides a solid foundation for long-term growth and stability, enabling businesses to navigate challenges and capitalize on emerging opportunities. As interest rates peak, it is an opportune time for new businesses to assess their fixed-income portfolios and implement these strategies to boost their cash flow and financial resilience.
Article First Published at: https://www.cnbc.com/2023/07/20/optimize-cash-flow-from-your-fixed-income-portfolio-as-rates-peak-per-ubs-.html