The hidden asset class
What asset class maintains value despite the markets? Lowers risk? Diversifies your portfolio? Is low- or no-fee? Is extremely liquid? And is usually overlooked as an investment category?
You guessed it: cash. Moola. Dough. Smackers. Simolians. Shekels. Wampum. Benjamins. The green stuff, which is now mainly electronic bits floating around our economy, is an endangered species. Even wallets are becoming obsolete with smart-phone payments. Yet, when markets falter, “cash is king.”
CASH INVESTMENTS 101
This investment is available in many forms. Several are FDIC insured and sold by banks. Others may have SIPC insurance and are offered through brokerages. Some types are:
• Money market funds
• Certificates of deposit
• Bank savings & checking accounts
• Treasury bills
Cash equivalents are usually investments that mature in 90 days or less. It could be cash in the bank (very liquid) or a 3-month T-bill.
There are even some mutual funds that invest in super-short-term bonds that are in the gray area of being considered a cash investment.
Cash is an important part of a portfolio. If you have a long-term horizon, you might want 0-5 percent of your investments in cash. Ideally, you have high-income investments that are providing a steady flow of cash, acting as ballast for your portfolio.
Depending on the economy, the markets and your level of active investing, at times you may have up to 100 percent cash. I’ll sometimes recommend this to my clients in extreme conditions. Too much cash can make you miss rising markets and other opportunities. It’s a delicate balancing act.
CASH INVESTMENTS 202
Not all cash is created equal. The U.S. dollar performs against other countries’ cash. These currencies move in value relative to each other. Here’s where cash can become volatile. And be a sophisticated diversifier.
This relative movement is called correlation. If there’s a high correlation then investments tend to move in price together. A low, or negative, correlation sees investments move independently or in opposite directions. According to ProShares.com, currency has a -0.10 correlation to large U.S. stocks. So, if large stocks go down 10 percent then a currency investment could go up 1 percent.
Different correlations can help to smooth-out portfolio volatility. Some investments move up while others are going down. These differences can be useful in maintaining returns with lower risk.
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