Understanding Investing

Making the Most of Your Cash Allocation

A liquidity tiering strategy may help investors gauge how much cash they may actually need in their portfolios

Investors hold cash for a number of different reasons, such as forshort-term liquidity needs, capital preservation, and when they’reconcerned about the impact that market volatility may have on theirportfolios. Depending on the reason, holding the bulk of their cashallocation in traditional cash instruments may not be the best option forinvestors.

A liquidity tiering strategy may help investors gauge how much cash theymay actually need in their portfolios based on their goals and objectives,and how much they should consider allocating to higher-returning shortduration strategies.

What this chart shows

Many investors hold more cash than they may need to meet their objectives.Shaped like a funnel, the liquidity tiering strategy below highlights theallocation building blocks and the approximate size of each depending ontheir goals and objectives. Tier 1, at the bottom, tends to be the smallestand is generally reserved for immediate cash needs and daily expenditures,while the larger Tier II can be used as a semi-permanent asset allocation;here, investors may consider actively managed short-term strategies toenhance their return potential versus traditional cash strategies. Finally,Tier III is often the largest of the three: Dedicated return drivers, likecore bond funds, can help investors seek to outpace inflation and preservepurchasing power over the long-term. Both Tier II and Tier III come with anescalating modest degree of additional risk versus traditional cashinvestments.

What it means for investors

Volatility can be worrisome, but rather than sitting on the side lines byover-allocating to cash, consider moving slightly up the risk-rewardspectrum with a tiered approach. Allocating to diversified,actively-managed short-term bond strategies in Tier II can help investorsenhance return potential while still maintaining an attractive liquidityprofile. And sticking with return drivers in Tier III, such as activelymanaged core bond strategies with a global opportunity set, can helpdiversify equity risk and potentially generate the returns needed forlonger-term spending needs.

A Tiered Approach to Liquity

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Disclosures

The liquidity tier presented here is based on what PIMCO believes to begenerally accepted investment theory. It is for illustrative purposes onlyand may not be suitable for all investors. The liquidity tier is not basedon any particularized financial situation, or need, and is not intended tobe, and should not be construed as, a forecast, research, investment adviceor a recommendation for any specific PIMCO or other strategy, product orservice. Individuals should consult with their own financial advisors todetermine the most appropriate allocations for their financial situation,including their investment objectives, time frame, risk tolerance, savingsand other investments. Fixed income is only one possible portion of aninvestor’s portfolio, which can also include equities and other products.Investors should speak to their financial advisors regarding the investmentmix that may be right for them based on their financial situation andinvestment objectives.

All investmentscontain risk and may lose value. Investing in the bond market is subject to risks, including market,interest rate, issuer, credit, inflation risk, and liquidity risk. Thevalue of most bonds and bond strategies are impacted by changes in interestrates. Bonds and bond strategies with longer durations tend to be moresensitive and volatile than those with shorter durations; bond pricesgenerally fall as interest rates rise, and the current low interest rateenvironment increases this risk. Current reductions in bond counterpartycapacity may contribute to decreased market liquidity and increased pricevolatility. Bond investments may be worth more or less than the originalcost when redeemed. Management risk is the risk that theinvestment techniques and risk analyses applied by an investment managerwill not produce the desired results, and that certain policies ordevelopments may affect the investment techniques available to manager inconnection with managing the strategy.

This material contains the opinions of the manager and such opinions aresubject to change without notice. This material has been distributed forinformational purposes only and should not be considered as investmentadvice or a recommendation of any particular security, strategy orinvestment product. Information contained herein has been obtained fromsources believed to be reliable, but not guaranteed. No part of thismaterial may be reproduced in any form, or referred to in any otherpublication, without express written permission. PIMCO is a trademark ofAllianz Asset Management of America L.P. in the United States andthroughout the world. ©2018, PIMCO.

CMR2018-0910-353668