Wednesday, June 29th, 2016
A recent Wall Street Journal article reported record numbers of large retirement plans and open-ended mutual funds were being pulled out of the stock markets – about 200 billion U.S. dollars' worth since the middle of 2014. Volatile stocks, plus low oil prices, are partly to blame for professional money managers moving so much money to cash.
Should we do the same? On the plus side, cash accounts give you instant liquidity and protection in a down market. Plus, with today's low inflation, you don't lose much purchasing power. But there are minuses too. For instance, today's money market funds and savings accounts offer only a fraction of a percent interest, and by moving to low or no volatility investments, you can miss out on potential returns when the market rebounds.
What are your money goals?
Before deciding, it's a good idea to reflect on what exactly you're trying to do with your money. “We all have different investment objectives and reasons why we invest," says Silvio Stroescu, Tangerine's Vice President of Savings and Investments. “If institutional investors make certain moves, it doesn't necessarily mean they're smart moves for individual investors to make."
That's because our individual objectives, time horizon and risk tolerance are likely to be different. Institutional investors base their decisions on the goals of the investments they're managing. “Aligning our decisions to our plan is really the only element the two should have in common," says Stroescu. “Our plan should be anchored in what we want to do with our money and our objective for getting into the market in the first place."
Tuning out the market noise
The key to achieving those objectives is having the discipline to stick with your plan and ignore the market noise. “The main driver to our success is not so much tracking the market returns but how we behave as we pursue our plans," says Stroescu. “We shouldn't pull out of the markets based on something we heard in a cab or what institutional investors are doing, as that may not be the best thing for us and our goals." Acting on that noise, or tips and gossip, can undermine our ability to earn strong returns in the long term, more so than the actual market returns themselves.
Different strategies with age
Depending on our objectives, age, needs and risk tolerance, there are a few basic rules of thumb for keeping cash in your portfolio. A mature person with substantial accumulated wealth, now looking to live off the earnings, may want a larger cash proportion to protect against the ups and downs.
For a younger person in the wealth building stage, with a 20-to-30-year time horizon, there's risk to staying entirely in cash, says Stroescu. “Shifting to cash brings the risk of not achieving our projected returns in the long term. Our asset allocation needs to be grounded by our objectives. Tune out the noise and focus on the things that we can control, such as investing on a regular basis."
So while the “cash is king" motto may be generally accepted wisdom, how much of it to hold is an individual matter. In any case, your individual needs determine what's best for you. Speaking to a professional may help you ensure your investments are aligned to your needs.