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The Role Cash Serves in a Portfolio

Cash in a portfolio should have a specific role in a portfolio. We see cash as fitting in one of these three categories:

  • Liquidity provisions: this is to cover expenses and emergency funds.  This includes money to pay for the mortgage, the unexpected new roof, basic living expenses, etc.
  • Defensive position: Cash in this pot acts as a cushion against stock/bond volatility.
  • Offensive position:  In some cases, we recommend keeping higher levels of cash until trends in the market change.  In this case, we maintain cash reserves for future investments.

How much cash in each category depends on your expense pattern, your goals and risk tolerance.

Contact us today if you’re interested in making your cash work harder.

 

The Risks of Having High Levels of Cash

Investors have been keeping record high levels of cash in their investment accounts and savings accounts.  It’s a logical place to park money for a while. It’s relatively safe, readily accessible and a very common practice.  Unfortunately, many investors are moving to cash without a strategy guiding them.  So what’s the problem with having a high level of cash?

1) Your cash is earning next to nothing. The government is discouraging savings by keeping interest rates low.  They are doing this to push investors into the market and to invest in stocks and bonds.

2) Low interest rates will likely continue. Janet Yellen, the incoming Fed Chair has signaled her intentions to maintain similar policies as her predecessor.  These poor savings rates could continue for the next few years.

3)  Inflation will slowly eat away at your purchasing power.  This slow, ever-present issue catches many investors off guard.

4)  In addition to inflation risk, you also face opportunity risk.  Many investors sat in cash during the last few years, while the markets hit all time highs.  That’s a missed opportunity.

Bottom line: The government is punishing you for saving, and rewarding you for investing.

You need to develop a strategy for your cash. It’s important to treat cash as an asset class.  It needs to serve a specific role in the portfolio.

Contact us today if you’re interested in making your cash work harder.

 

NU Fixed Account Update

In a recent newsletter by the Association Retired Employees of Northeast Utilities (ARENU) , we wrote about the popular Fixed Account in their 401(k) plan at Fidelity that many NU retirees use. After the article went to press, a major development occurred: The interest rate on the fixed account decreased from 3.5% to 2.75%. That decline is steep – well over a 20% reduction, and it raises a lot of flags for us:

  • The rate has dropped below the long term average inflation figure of 3%. That means the cost of living could outpace the income generated in the fixed account. Retirees who are withdrawing interest on a regular basis will see their income decline.
  • The rate decreased at a time when interest rates elsewhere are holding steady or even increasing. This may be an indication of subpar rates for the foreseeable future in the fixed account.
  • This change has significantly reduced the fixed accounts relative appeal. Now, there are many strategies that are just as competitive as the fixed account and in some cases offer additional benefits.

If you’re concerned about how this change will affect you, please contact us for a meeting. We can work with you to identify a strategy to meet your needs or fill the gap that this rate change caused.

Should You Be Rotating Out of Bonds?

This past summer, we may have seen the warning we needed when it comes to the portion of your portfolio in bonds. Interest rates can’t go down any more, they can only go up. This could result in the value of your current bond holdings going down. This is discussed as “The Great Rotation”. Investors who flocked to bonds in 2008 and 2009 are now starting to rotate to stocks. On the surface, many investors think it’s time to drop bonds altogether.

And it’s not just investors thinking this way. Many of the top financial institutions agree (great chart on that here)
When the consensus is that bonds will be a weak investment, it’s easy to jump on the band wagon. But markets often do exactly the exactly opposite of what you would think.

Instead of following the heard, perhaps investors should simply review their bond holdings and look to upgrade the quality of the funds. Not all bonds or bond funds will be affected by rising interest rates the same way –something the chart and most investors don’t follow.

Top Themes in Financial Services

A recent article outlined investment themes to look for over the next decade and listed some growing trends in financial planning. It’s reassuring to see these trends. We’ve been working hard to innovate within this industry and find ways to help our clients.  These trends are very similar to what we’ve been working on for the past two years:

Retirement Planning: We’ve focused our efforts on building Retirement Income Distribution Strategies that take into account all pots of money (savings & investments) and all sources of income (pensions, Social Security and annuities).  Our planning factors in the slow, ever-present, erosion of purchasing power that occurs each and every year –inflation.  In 20 years, the cost of living may double! Many clients don’t think about that when they retire, unless we illustrate it for them.

Low Cost Asset Management:  Many firms have very high minimum fees, where the firm will only accept new clients with at least $500,000 or more in investable assets.  Due to technology and automation these minimums are decreasing.  We’ve always kept our minimums lower than average and are happy to see the trend finally start to shift in this direction.  Ultimately, it will allow more investors to get more help than if they were to do it on their own. We often waive our minimums for referrals from existing clients.

RIA Advisory Services: The old model of charging upfront commissions on investments is disappearing.  Client don’t like paying high sales charges and we don’t like being in the position of having to “sell” a fund.  The alternative is to pay a small fee for advice and management on an ongoing basis.  It opens up the investor to a much wider pool of investments without having to incur new sales charges, and it allows for greater flexibility.

In the end, these trends are great for the investor: More affordable investment advice, better planning tools, and less in the way of expenses are all going to benefit the investor.

If you’re interested in learning more about any of these themes and how they apply to you, please contact us.