As an asset class, cash generally elicits one of two responses from investors: “cash is king” or “cash is trash.”1 Most of your clients probably are in one camp or the other, while some could be conflicted. On the one hand, they may see the positive benefits of holding onto cash — shielding against the unexpected or having more flexibility to invest as opportunities arise.2 On the other hand, they may harbor a genuine fear of missing out on investment returns and resulting portfolio growth.3
Each client’s situation is unique, and where they are on their financial journey comes into play. Those nearing retirement may need access to uninvested assets sooner, and cash may be an attractive option.4 Clients with long-term investment horizons or anxiety around market volatility could regret shifting from investments to cash.4 Whatever the situation, clients may turn to you for objective clarification and guidance.
This gives you a chance to discuss how it’s possible that cash may be viewed as neither “king” nor “trash” in terms of investments, but rather as an important piece of healthy portfolio management:5
- Cash provides liquidity. Having cash available within a portfolio ensures that investment fees, portfolio rebalancing, and other periodic or recurring expenses are covered without disrupting target asset allocation.5
- Cash provides flexibility. Inflation and deflation notwithstanding, cash assets retain a relatively steady value. This helps stabilize the impact of market volatility on portfolios and could put clients in a position to buy stocks at lower prices, if desired, during market downturns.5
- Cash provides low-risk returns. Instruments such as money markets funds, bank accounts, or Treasury securities are extremely low-risk investments but the tradeoff for clients is modest returns, especially when compared to stocks and bonds.4,5
For all the potential benefits, investors should exercise caution when considering cash — especially clients nearing retirement. While that timeframe generally triggers a more conservative asset allocation, shifting too far into cash holdings could limit portfolio growth potential and ultimately jeopardize long-term financial security.2
The Annuity Alternative
Cash assets have pros and cons, leaving clients with a lot to consider. For those who remain undecided about how cash allocations benefit them, annuities may offer a practical strategy. By balancing risk and reward, annuities provide clients with the stability and control of cash without having to sacrifice portfolio growth potential or future income.
Use the handy comparison chart, All Guarantees Are NOT Created Equal, to learn more about the various annuity options and how they help guarantee upside potential and downside protection. Click the button below to access your copy now.
1Charles Schwab, Schwab Intelligent Portfolios® The Role of Cash Investments in Asset Allocation, Undated
2Invesco, Understanding the role of cash in your portfolio, October 2018
3Investopedia, Holding Cash Instead of Chasing Investment Returns, February 26, 2018
4Wall Street Journal, What to Consider Before You Dash Into Cash, December 4, 2017
5MoneyLion, The role of cash in your portfolio, October 30, 2018