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Written by Kelly S. Olson Pedersen, CFP®, CDFA

Chart of the Month: Why do we use seven years for our first Tranche term?

At Caissa, we use a unique Tranches of Income approach when building our clients’ investment portfolios. This approach segments future withdrawal needs into three ‘Tranches,’ or timeframes, reducing clients’ anxiety about getting through the next market dip. The first Tranche includes one to seven years of cash flow needs.

While one-year volatility can vastly swing in either direction (up 50% or down 50%), as you extend the time used in your rolling average returns, the volatility SIGNIFICANTLY drops. The average downturn in a bear market lasts about 24 months (the 2008 financial crisis was only 17 months, long believe it or not!) and, on average, it takes about 36 months to recover those losses. The total cycle takes about five years.

As an extension of the recovery period, a typical bull market will last about five years (tacking on about three years post-recovery). So we build our portfolios to withstand five years of a down/recovery cycle and then add a couple of years’ cash flows to allow enough time for equities to recoup returns. This is one of the reasons we start with a goal of seven years of cash flows in our first Tranche for our clients.

Additionally, if we look to history, a diversified portfolio has never had a negative five-year rolling return (obviously never negative for a 10 or 15-year rolling return either). The stock market itself (as indicated by the S&P 500) has had as much as a -3% return for a five-year rolling period and that reduces to -1% for the 10-year averages, while the 15-year rolling return for the S&P 500 market has never seen a negative rate of return.

This history gives us more support than having an investment plan than can sustain through at least five years will provide enough time for a market dip as well as recovery. Adding an additional year or two (like we do), adds to that level of security and allows our clients peace of mind knowing their personal paycheck will be safely provided for while the markets zig and zag. Having this strategy in place, they can ignore the noise and let us lean into and out of equities as we see opportunities arise.

Time, diversification and the volatility of returns
Tranche 1: Seven Years


Caissa Wealth Strategies is a fee based, registered investment advisory firm, specializing in personal, dynamic wealth management. Based in Bloomington, Minnesota, CAISSA financial planning professionals provide individualized strategies for every client. You can expect more from CAISSA, and in turn, you will get a fiercely loyal advocate on your side. For more news and information on wealth management solutions, visit Caissa Wealth.