Most investors hold some level of cash in their portfolios. To better understand what role cash plays in a diversified portfolio, we sat down with Tom Kennedy, Director & Family Wealth Portfolio Manager at Ancora Inverness to discuss cash as an asset class.
Q. Tom, first of all what is cash?
A. For investment management purposes, cash is generally comprised of money market funds linked to an investment or brokerage account. Cash is considered an investable asset class along the lines of stocks, bonds and alternatives.
Q. What are the benefits of cash?
A. The long-term data about cash value to investors suggests that cash is an important part of a well-diversified portfolio. This is mainly due to the negative correlations with stocks and the reduced volatility in portfolios with cash holdings. Cash is also a liquidity tool, an opportunistic resource and a “parking lot” for short-term trading.
An important benefit that has been forgotten in the post 2007 interest rate environment is the yield earned on cash assets. While today yields are near zero, the long-term average return on cash assets is approximately 3%.
Q. Why do accounts hold cash?
A. Cash accounts are an important piece of the trade settlement process as well as a depository account for dividends and bond interest. Along with client deposits, these all contribute to higher cash balances.
Strategically, cash holdings also represent an opportunity to wait for market values to return to more favorable levels when current prices may not be sustainable. If an account doesn’t hold cash or some other resilient asset, the portfolio will not have an effective way to take advantage of meaningful drops in the market.
Q. What are some of the arguments against holding cash?
The main argument against holding cash is the opportunity cost of holding cash over the long term as markets tend to rise over time. This argument, however, should be weighed against the risk tolerance, goals and objectives of each client which includes each client’s time horizon and liquidity needs.
Thank you, Tom.
Sources: Ancora Holdings Inc., Charles Schwab, American Association of Individual Investors, NYU Stern Business School, Mauldin Economics, Factset.
Tom Kennedy is the Director & Family Wealth Portfolio Manager at Ancora Inverness.
The mention of specific securities, types of securities and/or investment strategies in this newsletter should not be considered as an offer to sell or a solicitation to purchase any specific securities or to implement an investment strategy. Please consult with an Ancora Investment Professional on how the purchase or sale of specific securities can be implemented to meet your particular investment objectives, goals, and risk tolerances. Past performance of these types of investments is not indicative of future results and does not guarantee dividends/interest will be paid or paid at the same rate in the future. The data presented has been obtained from sources that are believed to be accurate and credible. Ancora Advisors makes no guarantee to the complete accuracy of this information. The indexes discussed are market performance indices and are not available for purchase. If you were to purchase the securities that make up these indices, your returns would be lower once fees and/or commissions are deducted. Past performance of these indices is not indicative of future results of the securities contained in these indices.
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