The Cash Dilemma - An embarrassment of riches
When is cash the right choice to achieve your objectives?
There are important reasons to remain in cash such as if those funds are earmarked for spending in the shorter time frame. For example, cash is perfect when the risk of owning stocks is unbearable and inappropriate including when you are looking to make a purchase using that cash in the near future.
CASH IS FOR SHORT-TERM LIQUIDITY, NOT INVESTING
The existence of cash in portfolios is always a concern because it's often a sign of a ship without a captain. The safety of cash can be settling because of the zero risk that it will disappear. At the same time, those few days and weeks of comfort can easily turn into months and even years of lost opportunity that delays the achievement of goals such as retirement. We see this happen regularly with investors often struggling to shift gears because they don't have a plan in place that reveals the negative impact of cash on retirement savings. The easiest but often least effective decision is to do nothing.
Business Owners
Our business owner clients often need to maintain operating cash but usually have a holdco on the side as their nest egg. Entrepreneurs' families security and retirement plans often ride on the value of their equity as they prepare for succession. And although all business owners require operating cash, many have considerable excess funds that reside in a holdco and too often that holdco is resting in cash. That creates a nest egg that might, under historical circumstances, return 1% in cash vs 8% in a balanced portfolio. Over 10 years, the difference in growth is staggering at 1.10X vs 2.16X, ignoring taxes.
Banks love cash deposits
If there's one party that actually does benefit from cash deposits, it's banks. While those who hold cash at least have the safety of low-return liquidity, the banks are more than happy to use that cash and lend it to others for a profit. So, from that perspective, your cash holdings are not wasted. It's just that you're not the beneficiary, bank stocks are.
GICs - long in the tooth
GICs have been a terrific hit over the last couple of years with the opportunity to invest at unprecedented rates. However, the negative about GICs is that the window is very likely closing. It won't be closed for a while yet but it's time to think about the future and not just the next few months. For large depositors, the challenge of GICs remains that they are only insured to $100,000 and are iliquid and, hence, not great if you need to sell them before maturity.
In summary, what we're seeing is too much cash sitting on the sidelines instead of being in play where it belongs.
Your cash sitting it out
The good news
While interest rates remain at 20 year highs because inflation has not yet been successfully re-anchored at the target of 2%, the market opportunities for low risk and highly tailorable strategies are unprecedented. It's not investment products that create the opportunities, they simply capture them. But with rates still high, the choices of solutions should be embraced while they remain available. We don't want to belabor the point, but we will. All investment needs to start with objectives. A portfolio without an objective can't be measured based on its ability to keep plans on track.
Discussions with clients. Everything starts with a financial plan
As is often the case, what we share here derives from the many conversations we have daily with our partners, colleagues and clients. When it comes to the former, the primary driver of investment planning is to ensure that plans are on track. Here's we make sure they do.
- Through a thorough discovery we determine the full current state of a client's situation including their income, expenses, assets and liabilities.
- we then ascertain our clients' needs and objectives including their retirement goals, tolerance and ability to bear risk, future spending needs and plans for their legacy.
- We construct a path including an appropriate investment strategy to get from 1. to 3.
In simple terms, 3. is just a number - the required investment return.
So, when clients are in cash, we simply determine if that cash is helping them reach their goals which can be years or even decades into the future. And, in most cases, cash is simply a drag on performance and will never be able to maintain the purchasing power that gradually melts away with inflation.
We can't do justice to the full process here but it would include considerations such as tax and often business owner succession planning. However, the principals remain the same: find the most tax-efficient, lowest cost, risk-managed solution to achieve your objectives. It's our objective to help you reach your objectives.
Get in touch to get your financial plan in order. We'd love to help.
And, as always, we'll wind up with this week's global insight. Enjoy.
In this week’s issue:
The Fed adjusts its focus, but the rate outlook remains blurry: The Fed keeps playing down upside risks to inflation, but did it just start playing up downside risks to labor markets? Ahead of key jobs data, how sensitive might the Fed be to any labor market weakness?
Regional developments: Canada’s Trans Mountain Pipeline Expansion now in service; Employment costs in the U.S. rise while consumer confidence weakens; Europe: Growth picks up, inflation progress slows; Volatile swings in the yen
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