Are you an active investor? What are your thoughts on having cash in your portfolio? While there is a significant split among advisors as to what to do with cash, there are definite pros and cons to having cash in your portfolio and not having it in your portfolio. While this is not going to be one of the longer blogs, it is never the less is an important one for active investors.
While cash is and always will be king, it does not produce any returns so to speak of as compared to equities. An example I read recently stated a share of a blue chip company a decade ago cost about $17 a share. Today that same equity is trading for about $64 or an increase of 272%. A $10,000 investment would be worth almost $37,000 today invested in that one equity a decade ago, not a bad return considering while beating a cash investment considerably. Over that same period, cash would still be worth about $10,000 and the purchasing power of that same amount today would require $13,000 in cash. That is a losing proposition no matter how you cut it and the cause is inflation eats into cash as its return does not keep pace.
If you are, however, a passive investor that, the previous paragraph may not necessarily apply to you as an investor. Passive investors are not concerned about having returns that beat the market as they are more concerned about getting the same return as the markets. Also, most passive investors use indexed mutual funds or exchange traded funds that track an index. By investing this way, you achieve diversity as well as a return that is equal to that of the markets. Not a bad deal if you are okay with the volatility that accompanies the markets and returns that average a little less than 7% after being adjusted for inflation.
Now if you are an active investor your portfolio may look something like 60% equities and 40% bonds. Also, most of the equity positions will be in individual equities or actively managed mutual funds. The bond position may be individual bonds or a bond fund to most people, even active investors, prefer to buy bind funds over individual bonds. Now here is where I and many planners disagree with others, a small cash position is desirable. I would recommend between five and ten percent to be held in cash. The reason for this is two fold, one cash will help lessen any losses in the markets as a cash does not technically lose value. And second, cash allows you to add to strong positions or make new acquisitions in market downturns without having to sell existing equities or bonds. By, not having to sell you avoid selling low or any taxes associated with their sale.
In 2008 and 2009 Warren Buffett did what it seems very few others were able to do at the time. As none of us are a Warren Buffett and most of us have nowhere near his resources if you had any cash at that time you would have had some incredible buying opportunities. As he said at the time, he was not trying to time the markets but rather buy during opportune times. In many instances, his purchases saw the markets go down in some instances almost another 25%. But as he coined the now familiar phrase, you must be greedy when others are fearful.
For more information or questions, in general, please feel free to contact me.
