As an asset class, cash generally elicits one of two responses from investors: “cash is king” or “cash is trash.” Most of your clients probably are in one camp or the other, while some may 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. In light of recent market volatility, cash may feel like a safer bet.
On the other hand, they may harbor a genuine fear of missing out on investment returns and resulting portfolio growth. After all, if markets are down, they may go back up, right?
Clients with long-term investment horizons or anxiety around market volatility could regret shifting from investments to cash.
Whatever the situation, your clients rely on you for objective clarification and guidance. This gives you a chance to discuss how cash may be viewed as neither “king” nor “trash” in terms of investments, but rather as an important piece of healthy portfolio management.
The Benefits of Cash
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 because:
- Cash provides liquidity. Having some cash available within a portfolio may ensure that investment fees, portfolio rebalancing, and other periodic or recurring expenses are covered without disrupting target asset allocation.
- Cash provides flexibility. Inflation and deflation notwithstanding, cash assets retain a relatively steady value. This can help 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.
- Cash provides low-risk returns. Instruments such as money market funds, bank accounts, or Treasury securities are considered low-risk investments, but the tradeoff for clients is generally modest returns, especially when compared to stocks and bonds.
The Downside of Cash
There may be a sense of security knowing that cash typically holds its value, but that doesn’t mean there aren’t any risks:
- Cash may not keep up with inflation. Consumer prices rose 9.1% year over year ending June 2022, the largest increase in more than 40 years!1 These same consumers are well aware that savings accounts and money market funds won’t earn enough interest to keep up, resulting in negative real rates of return over time.
- Cash interest earnings may be subject to taxes. In addition to potential negative rates of return due to inflation and meager interest rate earnings on bank accounts, CDs and money market accounts, those earnings are taxable in the year they are paid.2
- Cash may limit portfolio growth. 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.
The Annuity Alternative
So, what are investors to do, especially if they’re concerned about market volatility? For those who remain undecided about how cash allocations benefit them, annuities may offer a practical strategy. By balancing risk and reward, annuities may provide clients with the stability and control of cash without having to sacrifice portfolio growth potential or future income.
Several annuity products allow investors to participate in market-like gains while protecting against significant loss. For highly risk-averse clients, advisors can recommend annuity investment options that have a greater potential for return than traditional fixed income allocations.
Dispelling annuity myths may help assure investors that their money can be accessible, that they can designate beneficiaries, and that rates of return have the potential to outperform traditional savings vehicles. Of course, much of this depends on the products being offered.
For example, some fixed annuities offer guaranteed rates and steady, tax-deferred growth, and clients can assign beneficiaries and access funds in times of need. Index-linked annuities can allow clients to choose their comfort zone to allow for potential market gains while also setting a limit on loss.
Today’s customizable annuity products offer many more options and benefits than some complex, one-size-fits-all products of the past. Be sure to explore CUNA Mutual Group’s array of annuity products to find which ones may be right for your diverse clientele. Also explore our Elevate™ Advanced Planning Resources for tools that can help you provide an elevated client experience with guidance on investing, legacy planning, rollovers, annuity strategies and more. Simply click the link below.
Written by: Marshall Heitzman, CFP®, ChFC, FLMI, CPCU, BFA™
Marshall is a VP - Advanced Planning Consultant with CUNA Mutual Group and has more than 25 years of experience in the insurance and financial services industry. He consults Financial Advisors on advanced retirement planning concepts for retirement and wealth management clients.