Cash is king… or so the saying goes. Over the last few years, we have seen interest rates consistently lowered by the Reserve Bank of Australia (RBA); terms like “quantitative easing”, “bond buyback program” have entered the modern lexicon and trillions of dollars of stimulus relief has found its way into the global economy. While interest rates on term deposits and investments that are use a “risk-free rate” are sometimes below the real rate of inflation, there has been an increasing call across the globe from analysts, portfolio managers, treasurers, finance ministers, and investors themselves, to reduce the amount of cash they hold in their overall financial position as it seems an unproductive asset. There is an argument that it lowers the rate of growth of your wealth. This being more acute in a time of rising inequality, where people with large amounts of capital have seen their net wealth increase astronomically, while those without access to capital have not taken part in the increasing size of that magic pudding.
Those who fall into the various middle-income brackets and have access to some capital, can become anxious that if they do not grow their wealth in line with target inflation, then overtime, they may experience a reduction in the buying power of their capital, or a reduction in the standard of living as the cost-of-living increases.
However, we should also look at an opposing view to see if there is a place for cash in portfolios. If so, how would it be strategically placed? People who have held some cash in their bank accounts or portfolios since January 2020 have had some unexpected advantages compared to others.
Firstly, for long term investors, having cash meant they had the ability buy in to a market where share prices had dropped ~30%. Accumulating assets and lowering their average cost.
Secondly, self-funded retirees with account-based pensions having liquid cash meant that they did not have to sell their growth assets in order to fund their day-to-day living expenses, and in fact they were able to ride out the market volatility and potentially now have a higher balance in their investment accounts than they had at the start of the relevant period.
We then look at younger investors who are reliant on their incomes to meet their commitments and their ability to service their liabilities. Having cash on hand meant that when many companies closed during lockdown and some were put on long periods of no pay, or there was a reduction in salary, this cash meant that they were able to continue to meet their regular debt repayments and keep funding their normal lifestyle without having to look at other actions such as withdrawing from the superannuation.
Lastly, small businesses that governments admirably supported with JobKeeper and other stimulus measures, having cash on hand meant that they were able to retain key personnel who would be hard to replace in a growing market and in labour scarcity such as now.
In summary, there is a very attractive argument to have a strategic amount of cash somewhere between six to twelve months of living expenses or debt repayments, and possibly up to 5% of your portfolio for long term investors. This matched with a with an unemotional, disciplined, and preordained methodology to invest through different market conditions means that the old adage may still be true.
Pradan Yeluri is an Executive Advisor at Viridian Advisory.
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