Have Some Cash? Put it in Your Mattress.

This is a little late in the posting, but an article in the WSJ from about a month ago advocates putting your money into cash. In other words, don’t invest it in stocks or bonds, but just hoard it! Well, not quite. They are telling you to put some of your money in cash, and it makes sense to do so.

All investors should realize that cash can be priceless, even when its yield after inflation is negative. Cash “is an option on the future,” says Abhay Deshpande, a portfolio manager at the New York-based First Eagle Global and First Eagle Overseas mutual funds, which have $58.4 billion in combined assets.

Having a cushion of cash can help you stay invested when stocks tumble—as they surely will sooner or later. And a cushion can enable you to do what cash-poor investors find almost impossible: Buy stocks and other assets as bear markets turn them into bargains. [link]

Keeping some cash handy makes particular sense in today’s markets which are (arguably) experiencing stock market bubble. From that same article:

Counting short-term corporate and foreign-government bonds, IVA International Fund has approximately 40% of its $3.3 billion of assets in cash and equivalents. “It’s rare for us to go to the levels you see today,” says Chuck de Lardemelle, co-portfolio manager of the New York-based fund. “I wouldn’t call this a bubble yet, but we see just about all asset classes as expensive, and we see very few opportunities in equities.”

What he is saying, essentially, is that equities are expensive today. Reap the rewards of rising stocks with the money that you have already invested (presumably in your retirement plans, if you are not an active investor); but hold off on any new investments and save your cash for the future, when the bubble ostensibly bursts. At that time, stocks will be cheap, and you will have your cash ready to swoop up on the bargains. So how much cash should one hold? According to Mr. Deshpande, 21% of your total investments.

At Mr. Deshpande’s Global and Overseas funds, cash totals roughly 21% of assets, a level he calls “the high side of normal.” He emphasizes that the high cash balance isn’t some kind of market-timing judgment. But in stock markets around the world, he says, “everything’s gone up.” His team will hold the cash until there is “an abundance of opportunity” again.

Is this some magic number? No. You have to figure out how much you are comfortable with, based on your risk preferences, and your other investment opportunities. At the very least, talk with your financial advisor about it and get her/his opinion on it.

“People look at cash as a drag,” says Steven Romick, manager of the $14.1 billion FPA Crescent Fund, which is based in Los Angeles, “and if you believe the market’s going straight up from here it certainly is.” Still, cash is a “very precious commodity if other people don’t have it and you can put it to work when there’s an opportunity.”

This makes sense. It isn’t anything new, per se, but it bears reminding every once in a while.

Be Sociable, Share!

If you enjoyed this post, make sure you subscribe to my RSS feed! You can also follow me on Twitter here.

Leave a Reply