Rethinking Idle Assets

Tab 1

February 06, 2015


It’s often said that cash is king. However, if you are holding large cash balances — with the intention of keeping that money liquid or secure — you might want to consider other options that could meet your risk and liquidity objectives and support your overall goals.

 

“You might be surprised to learn of investment strategies that could enable you to invest some of your idle cash in a potentially low-risk, low-volatility portfolio and support your goals,” says Jeffrey Kravetz, CFA, Regional Investment Director for The Private Client Reserve of U.S. Bank in Phoenix. “In addition, you may benefit if stock and bond markets are doing well. And that’s to say nothing of inflation. If you leave your money in a cash account that earns one-third of 1 percent, and inflation is close to 2 percent, you may be actually losing money over time because inflation can erode the purchasing power of your cash.

 

“We believe it’s not timing the market, but time in the market that matters,” Kravetz says. “That’s an old saying, but it’s really true. If you hold securities over longer periods of time, you may manage volatility more efficiently. If your goal is to thoughtfully manage and increase your wealth, consider a well-diversified investment plan, one that strategically addresses cash management needs.”

For example, a 2013 study of the stock market by Fidelity Investments concluded that $10,000 invested in 1980 would have potentially returned $332,502 by 2012, provided it were left in the market the entire time and all dividends/capital gains were reinvested. If that same $10,000 was taken out of the market on the 10 best market performance days, it would have grown to $160,340. And if that same $10,000 missed the market’s 50 best performance days, it would have grown to only $29,327.

 

A Possible Barrier: Fear

There are many reasons why people choose not to invest their money. One of the most compelling reasons is fear.

Tab 2

February 06, 2015


“Clients often worry that they’re going to make the wrong decisions and lose their money,” Kravetz says. “They’re concerned about what they can’t predict, and that concern about the unknown can cause some people to be much more conservative than might be warranted — like keeping large amounts of their assets in cash.”

 

The truth is, there are many things investors can’t predict: when the market will peak, whether it already has, the timing of interest rate changes or the effects of geopolitical events.

 

“People who are afraid of the market may be waiting for more certainty,” Kravetz says. “But there is never complete certainty.

 

“Fortunately, there are generally bright spots in the market. Today, that appears to be the broader U.S. economy, where fundamentals appear to be remaining strong,” says Kravetz, who cites a positive environment of low inflation, persistent job growth, falling unemployment, rising real estate values, positive corporate earnings growth, fair stock valuations, expanding GDP and low interest rates.

“As far as the fundamentals are concerned, we believe the U.S. stock market is positioned for a positive 2015,” he says.

 

Focus on Your Goals

Although there’s no escaping uncertainty in the market, investors may overcome their fears by taking a rational approach. Investors may consider an asset allocation based on their goals for those funds and categorizing them. Investing with this thought in mind may allow you to seize opportunities without compromising comfort.

 

“The worst game plan is letting your emotions dictate your actions,” Kravetz says. “In today’s investment world there are opportunities that can support multiple investor goals. To find them, you need to spend some time with your financial adviser, who can give you insightful choices for building a diversified portfolio that considers your risk profile and available opportunities in the market.

 

“Broadly speaking, we consider multiple asset classes and work to develop the appropriate mix based on your comfort level, goals and objectives,” Kravetz says. "In addition, we consider lines of credit and other lending options that provide cash management flexibility.”

Tab 3

February 06, 2015


Cash Management Strategies

The first step in creating an investment plan is to determine how much cash flow you really need. “In my experience, many people tend to overestimate the amount of cash they need,” Kravetz says. “One solution is to start ‘bucketing’ your money. For example, let’s assume you have $5 million in cash. You may need only $1 million for the immediate term, which leaves $4 million you can invest. Maybe $3 million of that is for long-term needs and $1 million for short-term liquidity. You can potentially minimize your risk by looking at the time horizon of each bucket and choosing horizon-appropriate investment vehicles. The more time you have, the more volatility you may be able to tolerate.”

To further moderate risk, invest gradually. “If I have $2 million to invest today, I’m not going to put all of it in the market tomorrow,” Kravetz says. “I typically phase into the market over a course of about three or four months, through dollar-cost averaging, which may reduce short-term volatility.”

 

When you hold on to just the cash you need now and make a thoughtful plan for investing the cash you need later, the result may be a best-of-both-worlds outcome that can minimize risk and potentially maximize returns.

 

“There are always opportunities to invest — in good and bad markets — and be smart about it,” Kravetz says. “The biggest risk of all may be sitting on the sidelines waiting for more clarity.”

 

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