Christmas & New Year's Boxes - Nine of Them - Part 3 Header Image

Christmas & New Year's Boxes - Nine of Them - Part 3

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Part 3 of 3

The nine-box process can be used for those with limited to extensive holdings. The more one has, the more complex the details will become, thus the need to compartmentalize. With that said, take a moment to think about the aforementioned.

If you paused, great if not, that’s a tell. Let’s continue.

Cash is not an investment, but rather something one has in anticipation of a spending need shortly. Cash is also something to have when one does not currently have a place to deploy it, or as an insurance against the loss of earned income which would force the sale of an intermediate or long-term holding at an inopportune time. If the lower left box is overflowing in value, compared to that which is in the middle or upper right, there’s a problem.

While certificates of deposit are a form of cash for some, I consider them differently. If the maturity date is less than five years, I consider CDs as intermediate-term and five or more years as long-term; however, CDs are not an investment. Why? Because the principal is guaranteed by the full faith and taxing authority of the government pursuant to the Federal Deposit Insurance Corporation (FDIC). An investment, as far as I am concerned, requires a level of risk. Some investments are riskier than others, and thus the expectation for a higher long-term return is appropriate. Note, however, speculation is not investing, and riskless holdings are not as well.

And so, the lumping of all cash into a single box lacks differentiation that definitely exists. While true, the solution is simple.

Divide each box into three equal segments by drawing two additional lines on a horizontal basis. The bottom segment of each box is for now or near-term, the middle for intermediate-term, and the top for long-term. With now or near-term literally means you have cash or can turn a holding into cash, within six months. Near-term cash items are those assets that can be liquefied within one year; however, there are no hard rules in this area. It depends upon one’s needs and unique situation. Intermediate applies to those holdings with a one or two-year minimum holding period with an anticipated maximum of three to five years. For long-term holdings, we again remain flexible with a minimum holding period of three to five years. Again, and it must be said repeatedly, there are no hard and fast rules in the arena of time. An academic, regulator or talking-head can holler and belly-ache all they want about not following their self-determined conventional wisdom on all with ears but ignore them.

Transitional

Here is a way to make things a bit more complex but will add clarity: Include transitional phases between each category. The transitional phase may be three to six months in length, and the choice is yours. With transitional phases, one will find themselves spending more time on the long-term and transitional phases than on the short or intermediate-term.

Time Frames

How many time frames do we use for mental accounting purposes? Five. As a result, each box in the nine-box process is divided into five segments.

Cash - Accessibility: Now

Near-term cash – Accessibility: Within 6 months

Short-term – Accessibility: Between 6 and 24 months

Intermediate-term – Accessibility: Between 24 and 60 months

Long-term – Accessibility: 60 months or longer

Because of this, it might be best to start over with a piece of graph paper that is ledger book size; however, the utility of a simple digital spreadsheet becomes obvious.

Percentage & Dollar Amounts versus Specifics

I have used a complex nine-box spreadsheet for decades on an individual, corporate, and client basis. The listing of assets includes a simple formula that calculates the dollar amount and for each cell (box), row, and column. Note that for the first time I used the word “cell” rather than box. Why? Because we call it the nine-box process, and that’s what I had you thinking about to imprint an image into your memory. Now I switched gears and began talking about spreadsheets and thus “box” is replaced by “cell,” which is the intersection of a row and column. Yes, for those of you who do programming and spreadsheeting, I know you get it, but for the overwhelming majority who will read this, it needed to be explained.

The dynamic use of our nine-box process spreadsheet provides easy visualization of hot and cold spots. Areas where money can and should be shifted, used, or available because of transitional properties. For example, let’s consider holdings in the middle column at the top, “tax-deferred growth,” and in the left column at the top, “taxable-growth.” You own Atomic Bomb Company (ABC) stock in your IRA (tax-deferred growth) as well as in your living trust account (taxable-growth). You want to sell ABC. In both accounts, you have a 20% gain. The sale within the IRA is not taxable as you will leave the sale proceeds within the IRA. As for the living trust account, it will be taxable at your capital gains tax rate. If you have a protocol of selling only when you achieve a net 20% profit, then you’ll need to wait a bit longer before selling ABC in the living trust account. The point is this. Coding out a transitional corridor, phase, or segment merely helps to identify those holdings that meet your pre-determined requirements for liquidation consideration. The process also reduces the out-size influence of emotions.

Emotional Ability

The overwhelming majority of the decisions made in life are emotionally based. Humans are emotional, and men are sensitive too. Yes, there are those who have the exterior of the rough and tough cowboy, and yes, there are ladies who say all men are the same, but the truth of the matter is that everyone has skin, some thicker than others, and everyone has emotions, with some much closer to the surface than others.

It will be those with thin skin and surface-based emotions that will have a mismatching of holdings. For example, an Investment Silo with TrueStar Advisors that is comprised of the 30 largest companies doing business with the United States Military, based on the total value of all contracts, not by the capitalization of the company, should be viewed as a long-term holding. This is not something that one should be dipping into on a willy-nilly basis for cash needs, and yet, there will be people who will see a drop in the stock market and have a Chicken Little response.

“Sell the holdings, the market is crashing.”

“Yes, the market is down, but it always goes up and down.”

“But this time it’s different.”

“Why this time.”

“I don’t know, it just is.”

“But have your goal and time frame changed for this Investment Silo?”

“No, I’m in it for the long-term, I need my money for the long-term, and that’s why we need to sell. Let’s go all into cash, and I know I have my money.”

At TrueStar Advisors, we are not psychologists. We will not engage in financial coaching or emotional-based selling. Our experience is rather extensive, and we’ve studied and trained the team to understand that people have emotions. At times, those emotions will be such that self-destruction will take place. Is it legal and ethical for one to self-destruct? Yes, it is, and it’s called free will. Who are we to say that everyone must walk in lock-step and determine the distance between each step that each one must take? The only thing we can do is provide advice when asked for it, but also to efficiently and effectively offer knowledge and wisdom on a broad public basis through this blog and our Connecting Dots podcast. We can also reward clients with additional insight by way of our Deep Dive podcast, independent reporting of holdings and performance, as well as tools, tips, and techniques to plan and prepare for today and the many days ahead.

Alternative

Is there an alternative to the growing complexity of the nine-box process? Yes. The alternative is a withdrawal process that we created for the 90% of our clients who prefer to keep it simple.

What is that alternative? That’s a good question and one that we are glad to provide to our clients who are the true stars and to whom we are the advisor.

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