Asset Allocation- Liquid- 75%, Illiquid- 25%. Here’s why.

Why does Lakeside Virtual Family Office, LLC recommend 75 percent of client assets be allocated to liquid investments, and 25 percent to illiquid investments?

At least three reasons.

One, most Family Office’s (FOs) focus on illiquid assets by necessity. For instance, let’s consider that the family net worth is tied up in a private business. If the business is unusually successful, it could beat the expected long-term average rate of return in the liquid public markets.

W.W. Cargill is an example of this kind of business. As one of largest private businesses in the world, with $120 billion in 2015 revenue, they just can’t be responsibly liquidated in a short period of time. In addition, since 1865, when Cargill was founded, it has acted on a code of conduct that, in my opinion, has helped the company avoid the dreaded “Midas Curse” of having Gen 2 or 3 sell off most of the family business. In addition, in my opinion, following a code of conduct is not always compatible with the myriad rules and regulations public companies must follow.
Some examples of Cargill’s Code of Conduct are provided at the company website, (

Here are just a few examples:

Our company’s ethical and compliance standards…serves as a guide for employees when they face dilemmas where the right choice is not clear.
We conduct our business with integrity.
We compete vigorously, but do so fairly and ethically.
We honor our business obligations.
We build and maintain the trust… of our customers and… partners by communicating honestly.
We treat people with dignity and respect.
We achieve our goals through our people.
We count on one another to act as stewards of the organization.

These are pretty powerful value statements, and you can imagine how they provide the glue that bonded together every employee from the boardroom to the mail room.

Two, Dan Ariely, a Behavioral Economist at Duke Univeristy, has stated that the three main lessons of Psychology are that our environment, intuitions and emotions often influence us to make irrational decisions ( This is especially true when it comes to making financial decisions.

Author and money manager Larry Swedroe summarizes why we have a strong desire to believe we’re right all the time in his recent Journal of Indexes article, “On Magical Thinking and Investing.” He cites excellent behavioral finance sources to explain why investors keep trying to out-guess the markets when the deck is so clearly stacked against them. Swedroe labels the need or desire to be an above-average investor as the “Lake Wobegon effect,” named for the popular radio series set in the mythical town of Lake Wobegon, where all the men are strong, the women are good-looking and the children are above-average, (By Rick Ferri, “Why Smart People Fail To Beat The Market,” excerpted from Forbes; May 12, 2012).

According to Robert Farrington, (OVERCOMING THE FEAR OF LOSING MONEY IN THE STOCK MARKET, The College Investor; Last Updated on September 22, 2015), studies have shown that the pain of losing is twice as strong as the joy of winning. So, losing $100 hurts twice as much as the same feeling you’d experience gaining $100. Ouch.

However, history also opines that investing in the stock market is the best way to build wealth over the long term. Read “Stocks for the Long Run” by Jeremy Siegel, Professor of Economics at the Wharton School of Business. If anyone told you that investing in the stock market was the safest investment you could make, you might raise an eyebrow. However, if Jeremy Siegel tells you this, prepare to be convinced. Siegel’s book is a comprehensive and highly readable history of the stock market that dramatically makes the case for long-term investing in stocks.

In summing up his approach to investing, Siegel writes, “Poor investment strategy, whether it is for lack of diversification, pursuing hot stocks, or attempting to time the market, often stems from the investor’s belief that it is necessary to beat the market to do well in the market. Nothing is further from the truth.” The principle of this book is that through time the after-inflation returns on a well-diversified portfolio of common stocks have not only exceeded that of fixed income assets but have actually done so with less risk ( review of the 5th edition; Keeping your money all in cash is actually riskier because you won’t be able to grow your wealth faster than inflation – meaning that your actual spending power will be less (i.e. you’ll feel poorer in retirement).

The science behind fear was first described by Walter Cannon in the 1920s as a theory that animals react to threats with a general discharge of the sympathetic nervous system, (What is the fight or flight response?; Fear is an incredibly personal experience. That’s why some people are afraid of flying while others fly every week. Some people are afraid of heights and others work in rock climbing. What the field of Behavioral Finance generally concludes is that fear, Psychology, and atavistic tendencies such as the fight or flight response all conspire to make it incredibly hard for the average investor to make successful investing a habit.

Three, sometimes being liquid can literally save you money and your business. For instance, read the following excerpt By Tracy Alloway and Luke Kawa; April 14, 2016, “Say Goodbye to the Fed You Once Knew” (Bloomberg – Say Goodbye to the Fed You Once Knew

“In the panic of 1907, a son of Italian immigrants turned American bank executive highlighted a truism of global finance. Having stockpiled liquid assets ahead of potential financial turmoil, Amadeo Giannini stemmed a run on his bank by displaying his bulked-up gold reserves to a nervous public, offering to convert customers’ deposits into the precious metal at a time when other banks were refusing to do the same. It was a move that insulated Bank of Italy, later to be renamed Bank of America Corp., from much market mayhem at the time and demonstrated the importance of maintaining liquid buffers in the financial system— an importance that was arguably forgotten in the run-up to the recent financial crisis. In the years before 2008, reserves held at large U.K. banks had drifted from around 30 percent of their total assets to a mere 1 percent, for instance.”

These events are severe and somewhat isolated. However, combined with investor’s irrational behaviors, they represent a powerful risk that LVFO tries to avoid. LVFO uses objective and subjective disciplines to minimize these kinds of risks and that is the foundation of a successful, diversified 100-year business plan.