With interest rates peaking, now might be a good time to boost the cash flow you’re generating in your fixed income portfolio. UBS recently highlighted a framework which helps investors tailor their asset allocation based on three objectives. First, there is liquidity which covers needs for the next three to five years. Second is longevity, which has a timeframe of five years and through the investor’s lifespan. Finally, there is legacy, which stretches from now through the next generation and prioritizes wealth transfer and charitable giving. US1Y US6M YTD line U.S. 6-month and 1-year Treasury yields By paying close attention to the liquidity portion of the plan, investors can meet cash flow needs in the immediate term while still allowing longer-term assets to appreciate. “In other words, it should allow investors to increase the return potential of their long-term investments while also reducing the likelihood of making impulsive investment decisions during periods of market volatility,” wrote Marianna Mamou, head of advice beyond investing at UBS. A core and satellite approach to boost cash flow For liquidity, UBS recommends a core-satellite approach. In the “core,” investors can build a ladder of bonds – that is, a portfolio of issues with different maturities – to meet expenses that have a known amount and certain timing. By staggering the bonds’ maturities, you avoid timing the market and you spread out interest rate risk. You also know when you’ll be getting your income payments from the bonds, which generally pay interest twice a year. The “satellite” portion of the strategy entails using three tiers to plan for unexpected spending needs. The first is “everyday cash,” which means investors should be stashing money that they can readily withdraw if needed. Consider that online banks are paying competitive yields on savings accounts, with Bread Financial offering a 4.9% annual percentage yields. The second tier is “savings cash” for money that you can afford to lock up for a short period of time. “Fixed-term deposits or money market certificates may be appropriate here, allowing investors to earn a higher yield in exchange for sacrificing some liquidity,” Mamou wrote. Indeed, Bread Financial and LendingClub are offering APYs in excess of 5% on 1-year certificates of deposit. Finally, there is “investment cash,” for funds that have a three- to five-year horizon. “Investors may find it valuable to invest these funds in short-term corporate bonds from highly rated issuers or select structured products with capital preservation characteristics,” Mamou said. Investors may find an exchange-traded fund that fits the bill here. Vanguard Short-Term Corporate Bond ETF (VCSH) offers a 30-day SEC yield of 5.43% and has a year-to-date total return of 2.35%, per FactSet. Meanwhile, the SPDR Portfolio Short term Corporate Bond ETF (SPSB) has a 30-day SEC yield of 5.52% and a year-to-date total return of 2.08%. – CNBC’s Michael Bloom contributed reporting.
