Insights into financial management - Tripholio™, Part II

Jay Cohen

August 1, 2008

B ack in 2000, like many other investors, Luke experienced the fallout from the bursting of the internet bubble.  He was not immune to the mistakes made by many investors.  Fortunately, Luke had reduced his holdings somewhat and was able to avoid a complete disaster.

He had experienced enormous returns in his portfolio during the 1990s, and it had become overly populated with high-flying, speculative technology stocks.  It occurred to him that trees do not grow to the sky and he began to liquidate a portion of his holdings.  Still, Luke suffered a 25 percent decline in his portfolio; better than the 65 percent decrease incurred by many of his friends and associates.

At this time, Luke learned an invaluable lesson. That is, he learned to periodically review his holdings and prune the tree. His advisor admonished him that "if you're going to have a tree and you know it's not going to grow to the sky, you might as well have a nicely shaped tree.  It should be balanced and symmetrical, and so should your Tripholio™."


On a followup meeting with his advisor, who had introduced him to the idea of the Tripholio™, Luke thought back to when he was paring his positions in late 1999.  The advisor was explaining to Luke the importance of moving gains from the long-term portion to the intermediate-term portion. Of course, the advisor explained the importance of taxes and expenses relative to pruning. And, he helped him understand the reasons why it makes sense to periodically move gains to safer, shorter term investments.

The cushion (intermediate) portion of Luke's Tripholio™ was being built to replenish the daily living expenses (short-term) portion.  This was recommended by Luke's advisor so he would have ample time to recover from economic and stock market declines that might occur.  Luke knew this was being recommended to maintain his current standard of living without being forced to take money out of the stock market at extreme low points.  Luke would replenish money used in the daily living expense portion with money from the cushion portion which was comprised mainly of intermediate term investments.

Luke's advisor did a great job of showing Luke that equity markets go up and down and sometimes they can be very volatile. While the long-term trend has been up, this is always subject to change. The advisor showed Luke how time can be a friend or an enemy depending upon how much of it an investor has.

Recall that Luke wanted to have seven years' worth of capital set aside in highly liquid, safer investments to supplement the shortfall in his retirement income. After seven years, Luke's advisor estimated he would need to replenish this daily living expense portion of the Tripholio™.

The purpose of the cushion is to hold investments which earn a higher rate of return than CDs or short term bonds, but are safer than holding equities or other alternative investments. Generally, the returns on this portion will be lower than for equities. However, the objective for Luke was to have a portion of his investments available to replenish the daily living expense portion upon its depletion after seven years.

Luke was comforted to know that he would have up to seven years of short term investments to live on and another portion in intermediate term investments to act as a cushion. This would allow for up to fourteen years for his long-term or legacy portion of his Tripholio™ to grow and blossom. In addition, this gave Luke's advisor plenty of time and flexibility to manage the growth of his legacy.

Jay Cohen is founder of Monterey Wealth

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