The Case for Keeping Some Cash

By Jeffrey R. Kosnett, Senior Editor, Kiplinger's Personal Finance

Two issues ago, I urged everybody to suspend all inclination to brood about gathering risks or missed opportunities and let one’s portfolio snooze. I obeyed my own counsel, not only by skipping this column for a month, but by ignoring my IRA and 401(k) and other investment accounts. In August, I sold a house I’d owned for 27 years, but so far, the proceeds are in the bank while my wife and I decide what comes next. (We’ll probably zero out the mortgage on our vacation–and our eventual retirement–home.) Whether it’s ad­visable for others to grab some capital gains, pay off debt or make other moves is a personal, life-stage decision rather than a blanket financial strategy.

Besides, anyone who forswore buying and selling securities since June, not counting autopilot transactions, has done just fine. Stocks advanced a little, bond yields and returns barely budged, and real estate investment trusts kept rallying. And although economic and monetary stress is spreading, investor harm has so far been limited to suffering or un­stable places such as Argentina, Brazil and Turkey (for more, see How to Navigate Investing in Emerging Markets). Such iffy markets deserve only the lightest presence anyway in a low-risk, income-driven investment plan. The super-strong dollar, a lead cause of emerging-markets troubles, isn’t without drawbacks, but it supports the value of U.S. bonds and real estate. It also restrains American inflation.

Darker skies. But I don’t feel comfortable telling anyone, including myself, to extend portfolio abstinence indefinitely. Kiplinger is not alone in sensing that financial markets will eventually get rattled by trade discord or something else and stumble toward higher inflation and a near or actual recession. The scolds that scoffed at the prospect of Alphabet trading at $1,200 a share or Amazon.com at $2,000 have long been wrong–as they were about year after year of solid returns in bonds and real estate.

But no investment is powerful enough to avoid losses forever. For the first time in years, cash accounts paying 2% are competitive with many classes of bonds and with the dividend yield on blue-chip stocks. That’s an incentive, or at least not a disincentive, to park some or all of the money from a house sale or a lump-sum retirement or insurance distribution.

I asked some veteran financial advisers and money managers for fresh thoughts about asset allocation and de-risking. I must say that their arguments for caution resonate more than they did six months ago. “U.S. fixed income is more challenged now because it’s hard to see how the Federal Reserve stops tightening,” says Krishna Memani, the chief investment officer of OppenheimerFunds. He adds that “cash is definitely more valuable” than before. He recommends a fixed-income mix of 50% floating-rate bank-loan funds (a kind of juiced-up cash with yields that rise as rates climb) and 50% short-to-intermediate-term investment-grade bonds (which lose less than longer-dated issues as rates rise). For 2018, this pairing has returned about 3%.

As for stocks, advisers are concerned that you may have too much in your portfolio after another year of good gains. AMG Funds’ Kevin Cooper, a point man between fund investors and financial advisers, says an investor with 65% U.S. stocks at the start of the bull market is now crowding 80%, which he thinks is too high. I agree. To downsize from 80% stocks to 60% doesn’t mean you’re expecting a crash or that a bear market is im­minent. But if you’ve made a pile of money in a long-running bull market, you have a chance now to trim the winners and patiently await the next opportunities.

This article provided by NewsEdge.