This week’s article discusses what to do with cash balances that have become unwieldy, something we’ve started to notice a lot more frequently with investors. Frankly, the significant increase in money on the sidelines due to attractive risk-adjusted returns from cash equivalents has been a pain point for many financial planners, like myself. While money market vehicles are paying around 5% in “risk-free” income, many investors have started relying on them as a primary source of retirement cash flow and are now a substantial portion of their investment mix. If this 5% yield were expected to remain indefinitely, I would support this approach for most of my clients. However, this strikes as us highly improbable, and rates recently have already started moving lower. Investors who have been far too complacent may find themselves heavy on cash but light on places to put it.
It's not only DIY investors who find themselves facing this issue. Some investors like the idea of keeping large amounts of “dry powder” planning to buy into market weakness. Then there’s those clients who we have on-boarded but were reluctant to “jump” straight into their maximum equity allocation given that stocks at or near all-time highs. Regardless, of the motive for parking capital in money markets, let’s understand some of the risks and then some proposed solutions for remedying the situation.
First, excess cash can become a drag on long-term returns, if the market continues its momentous rise. This means there could be an opportunity cost if stocks, which have historically vastly outperformed money markets, continue to soar to higher highs. Second, investors become complacent, and mistakenly assume that money market rates will stay here forever, thereby not implementing more prudent investment strategies that take this into account. There are plenty of investments out there that offer equivalent returns as money markets, but with the promise of doing so longer into the future. Lastly, investors assume they’ll be able to play age old game of musical chairs, suddenly altering their investments just before the music stops. Trying to perfectly time the markets can be a dangerous and costly endeavor. Instead, Evergreen’s investment team prefers to follow the motto of “Up a little, sell a little. Up a lot, sell a lot. Down a little, buy a little. Down a lot, buy a lot.” This describes the way that we fade in and out of areas of the market, rather than making ‘all or nothing’ moves.
Reasons vary as to why investors may have too much capital in money markets, but the reality is that we are potentially at the final exit before the toll. Below I propose three alternatives for you to consider before money market securities become deadweight in your portfolio. For current clients, any of these ideas can be discussed and implemented with your Wealth Consultant in a way that is customized to your financial plan and circumstances.
Summary
While holding cash can be a prudent strategy during volatile markets, it becomes less effective when markets are stable or strong. It also requires tremendous discipline to follow through on buying when markets dip. After such strength, it is reasonable to assume there will be weakness ahead for stocks, but that doesn’t mean it will play out as we envision or that someone sitting on a lot of dry powder will have the confidence to act. As the era of attractive short-term yields may soon end, it's essential to explore alternative investment strategies to avoid letting high cash balances weigh down your portfolio. Whether extending the duration of your fixed-income investments, employing a dollar-cost-averaging approach, or seeking sophisticated growth and income opportunities, taking proactive steps now can help ensure your capital continues to work effectively for you. At Evergreen Gavekal, we are committed to guiding our clients through these transitions, ensuring their investments remain well-positioned for long-term success throughout market cycles.
Reach out to your Wealth Consultant should you have any questions about how to more strategically incorporate money you have kept on the sidelines into your financial plan.
DISCLOSURE: Securities highlighted or discussed in this communication are mentioned for illustrative purposes only and are not a recommendation for these securities. Evergreen actively manages client portfolios and securities discussed in this communication may or may not be held in such portfolios at any given time. This material has been prepared or is distributed solely for informational purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Any opinions, recommendations, and assumptions included in this presentation are based upon current market conditions, reflect our judgment as of the date of this presentation, and are subject to change. Past performance is no guarantee of future results. All investments involve risk including the loss of principal. All material presented is compiled from sources believed to be reliable, but accuracy cannot be guaranteed and Evergreen makes no representation as to its accuracy or completeness.