Investing and allocating capital
How Should a Family Plan Liquidity Across Different Investment Horizons?
Short answer. Group obligations by when the family expects to need the money, then assign assets with suitable liquidity and volatility to each group. Near-term needs call for accessible capital. Longer horizons may allow less liquid holdings if they do not compromise obligations due sooner.
Group family obligations by when they are likely to come due, then match assets to each group. A family may have immediate spending needs, plans for the next few years, and goals spanning generations. Each obligation calls for an appropriate level of cash access and tolerance for market swings.
Build Horizon Groups From Family Goals
Start with the family's liabilities and priorities. Short-term needs may include living expenses or education. Intermediate needs may include funding a plan after a liquidity event or supporting charitable activity. Long-term goals could include preserving wealth or endowing an institution. Put a likely date and estimated amount beside each goal, and revisit those assumptions as family circumstances change.
The Family Office Book notes that family goals and time horizons can shift with events in family life. Review the plan when those needs change; an allocation may need to change too. See creating your family compass for a way to articulate goals and values.
Match Liquidity to the Obligation
Keep assets for near-term obligations accessible on the required schedule. Intermediate goals may allow a longer holding period, though the family should consider what happens if an expected exit or distribution is delayed. Long-term assets may tolerate more illiquidity and volatility when their value is not needed soon.
Treat each horizon as a separate liability bucket. The investment strategy in each bucket should fit the date and nature of its obligation, and should not simply follow a manager or strategy that has performed well. A capital call and liquidity planner can help align expected commitments with available funds. For obligations that may require funds soon, see reserving cash for taxes, spending, and commitments.
Coordinate the Whole Balance Sheet
Review public and private holdings together with cash and family spending, along with trusts and entities. A family can own assets that appear diversified while still depending on one holding to fund near-term obligations. Track expected distributions as estimates until they arrive; do not count them as available cash. If a private investment's return of capital is delayed, revisit which assets can cover the obligation without forcing a sale.
Set a regular review process and name who is responsible for updating the schedule and monitoring commitments. That person can also bring exceptions to the family or investment committee. Talk with your CPA about tax payment timing, and with your attorney about legal requirements. The response to delayed private investment returns can help clarify contingency planning. For the broader investment framework, see portfolio models.
They had different horizons and because of that they can accept the various levels of illiquidity and volatility matched to the time horizon.
Sources: The Family Office Book. Informational only, not financial, legal or tax advice.