Your Portfolio is Built for This Madness

In early February, I wrote a blog titled Every Dollar Has a Job.

In that post, I stress the importance of:

a)  Gaining clarity on your cash needs across various time horizons… at a minimum, you should use a three-bucket approach of short, intermediate and long-term horizons.

b)  Systematizing your portfolios as much as possible.

At the time of the post, the S&P 500 was up just over 2% for the year so not much cause for concern.

Fast forward to today and my have things changed.

The markets are none-too-pleased with Trump’s tariff war. Questionable logic and extraordinary uncertainty have left many businesses puzzled by how to run their businesses both now and in the future.

When businesses can’t plan, they don’t invest so what’s happening in stock prices is a natural reaction to the lack of confidence in how and when this all shakes out.

If you have been concerned, that’s understandable.

Owning stocks for the long-term has been and will continue to be an effective tool to build wealth. Near-term volatility is the price you pay.

But the tool must be used to fix the right problem. You don’t use a hammer on a screw nor a screwdriver on a nail (Not a handyman so that’s the best I’ve got for ya).

Long-term instruments like stocks should be used to satisfy long-term needs 12-15+ years into the future. Yes, you can add stock exposure to cash needs less than 12 years but you don’t want to introduce too much risk for a cash need.

A word on Duration: one of the trickiest concepts in finance to understand so let’s keep it simple. Duration is a bond’s sensitivity to a change in interest rates.

Long duration? Generally higher bond price volatility.

Short duration? Generally lower bond price volatility.

You want duration in your portfolio to correspond to the time horizon for your cash need.

For cash needs with shorter time horizons you want the majority of your portfolio in short duration (less volatile) bonds with a sprinkling of intermediate and long duration bonds to provide diversification.  

Enough about theory, let’s review three hypothetical portfolios in the context of the last week. Everyone has their own risk tolerance and tax situation so keep in mind these are for illustrative purposes and should not be construed as investment advice.

The data from the below tables is sourced from Morningstar.com and returns are as of market close on April 10th, 2025.

1-2 Year Time Horizon

For such a short time frame, keep these funds in a money market, high-yield savings account or a CD. These are yielding anywhere from 4.25%-4.75% at the time of writing this.

Sure, you can invest in ultra-short or short-term duration bond ETFs but those will rise/fall in value based on interest rate moves.

Stock exposure: NONE

5 Year Time Horizon

This is where you can start to introduce bond ETFs with varying levels of duration to provide diversification. You have some intermediate and long duration in here to complement a predominantly short duration portfolio.

Averaging all of these out gives you a portfolio duration of roughly 5 years, the time until your expected cash need. You could accomplish a similar goal with 2-3 funds.

A sliver of conservative stock exposure here could work for an investor with a high risk tolerance but not appropriate for most.

Stock exposure: NONE for most, a small allocation for some.

12 Year Time Horizon

The 7-12 time horizon is where things become much more subjective and highly dependent on individual circumstances.

This is where you may want to incorporate stocks for these longer time horizons.

Stocks do not have defined cash flows like bonds so quantifying duration is tricky. Yes, dividends are reliable but not a guarantee.

There’s a wide range of research on what duration on stocks should be and it’s highly dependent on the type of stock too. To keep it simple here, we are going to use 20 years as an approximate duration for stocks.*

-3%. For a 12 year time horizon, we can live with that.

Stock exposure: 30-60% depending on your risk tolerance.

20+ Year Time Horizon

With longer-term planning, namely retirement, you can afford to invest more aggressively. The price of near-term volatility is worth the reward of higher returns.

Anytime you find yourself peeking at your 401(k) or IRA account during volatile markets, always remind yourself you aren’t using that money for 20+ years. Don’t sweat it.

Stock exposure: 60-100% for most. You hear what I’m saying but still the volatility is too much to handle?

Dial back your stock exposure from 90-100% to something closer to 60-70%.

The environment we’re in right now is difficult to endure.

While you don’t necessarily need to build a portfolio for each and every cash need in the future, building strategies for three to five general buckets can greatly help calm your worries and, importantly, prevent you from emotionally-charged selling.

Need cash soon? Don’t get cute. Invest conservatively.

Need cash in 15-20+ years? Invest in stocks with total awareness that day-to-day volatility, while hard to ignore, has minimal impact on your long-term prospects.

Hang on and ride out the wild bronco.

* If you feel inclined to dive into theories on equity duration, you can find more information here and here.