Successful Investing: The Value of a 5-Year Cash Flow Plan

By: Joe Morgan

Aug 24, 2023 | Investment StrategyInvestment Philosophy5 Year Cash FlowSavings AccountLong-Term PortfolioLiquidity

Prefer to listen rather than read? Pair this post with Deliberate Money Moves Podcast: Successful Investing: The Value of a 5-Year Cash Flow Plan.

I’m often asked, “Where should I invest my cash if I plan to buy a [house, boat, car, etc.] in two years?” My answer is always, “Put it in your savings account so you know it will be there when you need it.”

Sure, you could get a bit more interest in a CD or another fancy cash vehicle. I’m not against that most of the time, but my industry has far too many high-yield products that aren’t as safe as they appear. In fact, I became a little finance-world famous in The Wall Street Journal for delivering this message right up to the Financial Crisis, when many were wiped out by their “cash investments.”

Successful investors always match their timeline with their investment strategies.

Who Are the Successful Investors?

Truly successful investors understand there is no free lunch, but if you set your cash aside for a long time in the right strategy, you’ll likely get paid well for your sacrifice. I’m talking about long-term investors: people who won’t use their investment funds for 5, 10, 20 or more years.

Using a trendy strategy might work for some time, but eventually the markets change, and those trendy strategies often suffer losses much greater than the gains made.

Check the founding date of your favorite actively managed fund. It’s likely after 2009. That’s because the hot strategies fund managers used before the crash caused their funds to implode on impact. I’m not saying so many funds went to zero, but their performance in one year was bad enough to wipe out the gains of previous years.

Losses were so great, fund companies closed old funds and started new ones with similar strategies and similar (or the same!) fund managers. Poor track records were buried with the old funds.

This was not unique to 2008 – it happens every time the markets crash!

No, it’s the long-term investor who sticks with proven strategies that wins.

Factors of a Successful Long-Term Portfolio:
  1. Always be well-diversified. This means never owning enough of something that can make a killing, so you’ll never own enough of something that can kill you.
  2. Invest only in highly liquid securities, but structure yourself so that your need for liquidity is low. Liquidity, not loss of income, is what causes bankruptcy.
  3. Buy and hold. Once you have a strategy you know will work, stick with it.
How Can You Manage Your Liquidity?

Expanding on Point #2 above, if you’re always liquid enough to pay your bills, you will never go bankrupt. Not losing is the first step to winning. The only way you can do this is to first know what your cash flows are.

I like to build a 5-Year Cash Flow that shows inflows (salary, bonus, stock vesting) and outflows (annual living expenses, taxes, extra spending) for each year. This way, you know exactly how much liquidity you need to draw upon each year for the next 5 years.

For the years that you have negative flows, meaning you’re going to spend more than you make, simply put those balances into your savings account. If you do this for all 5 years, you won’t be forced to dip into your investment portfolio for at least five years.

This is important because the stock market historically has had a negative return over 5-year periods only 13 percent of the time. That means that 87 percent of the time, market crashes will have no effect on your lifestyle.

How great is that?

Offset Future Expenses with Future Income

When calculating your negative future spending, it’s important to include future income.

If large future purchases are dependent on jumps in your future income (stock vesting, bonuses, raises, etc.), don’t include them as future spending items. You’ll use the extra cash that comes in—if it arrives. If it doesn’t, you won’t make the purchase.

Future spending items only include what you plan to purchase regardless of the economy’s bumps and struggles.

Examples of Future Spending Items:
  • Your child’s college expenses
  • Your daughter’s wedding
  • Helping your son with his first home purchase
  • Home renovations (those that are required)
  • Extra travel during sabbatical or retirement
Be Sure Your Investment Strategy Will Work In All Seasons

One note of caution: Your investment strategy has to work over time. By “work” I don’t mean that it always goes up. In fact, I believe you have to ride down the markets to enjoy the greater upswings that net a great return over the long run.

In other words, a working strategy always comes back when the market does. Do what has always worked instead of what might be working just now.

Once you have a great strategy that can survive future bumps and crashes, you’ll become a true long-term investor and be on the road to financial success!

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