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The scary consequence of being canceled and losing your job is how quickly the money goes out. No matter what you do to deal with it—selling your car, not drinking champagne before 3 p.m.—the day-to-day expenses will soon overwhelm them.
That’s why financial advisors recommend keeping a certain percentage of your assets in cash. You never know when you’ll be on stage at a conference telling a joke about Miami being underwater.
As a rule of thumb, the amount is equivalent to three to six months’ income. In fact, according to the latest Bank of England figures, the average person in the UK has £17,000 in a savings account – exactly half the average annual income.
Yeah, right! Averages are nonsense and most of us are either unwilling or unable to put enough money aside. But what should investors think about cash? For a diversified portfolio such as a retirement fund, where access to liquidity is not the point, what is the right amount?
I’ve been asked these questions a lot this week because of the conflict in Israel. Unexpected events often make us rush to cash out. But there was a time when hoarding increased. Higher interest rates make deposits more attractive.
Just this week, Mohamed El-Erian told the FT Money Clinic podcast that he had reallocated some of his money from stocks to “basically cash”.Meanwhile, hedge fund billionaire Ray Dalio now thinks his old “cash is garbage” mantra no longer real.
As always, the wealthy have made their move before heading to Ibiza or the Hamptons for the summer. A CNBC June Survey US households with more than £1 million in investable assets find that a quarter of their portfolios are in cash.
This is consistent with an average allocation of one-third in cash or cash equivalents (such as money market funds or certificates of deposit), Capgemini Survey The results of a survey of 3,000 wealth managers and clients were revealed in the same month.
I read the surveys at the time and couldn’t believe the numbers. Such a high cash position goes far beyond what is needed for emergencies such as paying for a new boat or buying Penelope her own apartment near the Art Institute.
Why is so much money leaving the market? All long-term asset research clearly shows that cash is the worst-performing asset class over any medium- to long-term period you look at.
Maybe laziness? Of course, my 12% weighting is because I didn’t bother to reallocate some of the cash raised from selling U.S. stocks last month. I could pretend I was timing the market – but I’d be kidding myself.
indeed, An April study from Allianz Life Shows two-thirds of U.S. investors know they have more cash than they should. Behavioral scientists would no doubt say it has to do with irrational biases against uncertainty or potential losses.
But there are situations where holding a lot of cash can be the right investment choice (this can last for decades, as Japanese housewives know all too well). This comes at a time when the outlook for every other asset class has gotten worse.
But what does “worse” mean? If that means a direct comparison of inflation-adjusted returns, it’s hard to understand why cash would be more attractive today.
In the UK, for example, the best instant access savings accounts offer around 5% interest. Inflation rate is 6%, that is, the actual rate of return is -1%. Five years ago, the deposit rate was 0.8% and the inflation rate was 1.8%.
So the actual returns are the same. The argument that cash is superior to other asset classes also doesn’t hold water. For comparison, the UK 10-year government bond yield at the end of 2018 was 1.7%, with a real yield of zero.
Today, those gilts yield 4.4%, or negative 1.6% after adjusting for inflation. Now yield is not the same as total return.we should take a look expected The returns are adjusted for the risk taken.
In the former case, bonds will underperform if interest rates continue to rise, and vice versa. In the latter case, bonds are more volatile than cash. Bonds also face rating risk, credit risk, interest rate risk, default risk and liquidity risk.
You need a PhD to price these. But apparently some investors have concluded that an extra percentage point in real returns isn’t enough to compensate them for the extra risk. They would rather have the certainty of cash.
However, this misses a key point in managing a portfolio. Of course, bonds rise and fall more than cash. But equally important is how they move relative to other assets you hold. Cash does nothing when stocks fall, while bonds tend to rise, reducing overall risk.
Another mistake some people make is thinking that cash in a bank account is synonymous with “cash-like” investments like money market funds. Of course, the latter has the word “money” in it. But they are not cash.
Most money market funds are filled with short-term fixed-income instruments issued by banks, governments, or corporations. They are always high quality, but these securities are subject to the same risks as owning bonds.
With more than $1 trillion invested in global money market funds this year, I wonder how many investors think they have no risk? But then again, cash is not without risks, as any Argentinian hit by inflation will tell you.
No wonder I receive more emails asking me to write about cryptocurrencies and gold than any other topic. I’ll probably do this when I get one that’s not all caps. For now, though, I don’t expect any cash to appear in my portfolio next week.
The author is a former portfolio manager. e-mail: Stuart.kirk@ft.com;X： @stewartkirk__
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