The Myth Of Needing To Be "Fully Invested"

As an advisor / portfolio manager we often end up in discussions with clients about holding "cash" (or cash equivalents) in a portfolio.

There are a few important reasons for this:

1) Cash Flow: 

a) depending on anyone's individual circumstances, cash may be needed for lifestyle needs and to avoid being "forced" to sell an asset at an inopportune time, cash is good to have for this purpose.

b) as savings are added to a portfolio, it is important not to be "fooled" into necessarily putting that money to work immediately, but to be patient for reasonable opportunities.

2) Strategy:

There are those who might debate the idea of trying to "time the market" and academic studies show, that over longer periods of time, market-timing (tactical) strategies (picking tops and bottoms for asset prices) under-perform.

However, there can also be good economic reasons for increasing the weighting of cash in a balanced and diversified portfolio.

Cash is an asset. It is a defensive asset.

When prices of growth assets are in decline (deflating), cash is an asset that will hold its value and provide a haven of safety, protecting our capital.

In a balanced portfolio, it will cushion the total decline of the combination of other declining assets.

When asset prices are expensive (an argument which we currently believe to be true), it is prudent to increase our cash weightings (even if it is temporary).

What would you rather have? 

A money market fund earning 1.0% (or perhaps a t-bill at .25%) or an index ETF that has fallen 5%? (just for a simple comparison).

Global debt levels have increased 3 fold over the past 10 years!

Goldman Sacks put the number at $50 trillion in a report released on October 12 called: 

"Welcome To The 3rd Wave Of The Financial Crisis"

This wave is characterised by rock-bottom commodities prices, stalling growth in China and other emerging-markets economies, and low global inflation, Goldman Sachs analysts led by Peter Oppenheimer said in a big-picture note.

This triple whammy has its roots in the response to the first two waves of crisis — the banking collapse and European sovereign-debt crisis — and it is all part of the so-called debt supercycle of the past few decades.

But with bond yields in real terms close to zero, and policy rates at historical lows, this extraordinary combination of events has raised concerns about the sustainability of the financial returns on a forward-looking basis, particularly if deflationary forces continue to develop.

If this is in fact the case, we think that it might be prudent to increase our weighting of cash.