Cash: not just a passive asset – Graeme GillPublished on 01 February 2019
The important role of cash in investment portfolios
Cash is a valuable tool in client portfolios. It provides liquidity and helps to decrease volatility across the entirety of a family’s wealth. It has long been seen as the ultimate safe haven for assets. If you have cash, it isn’t going to go anywhere because its value isn’t impacted by movements in price.
The only thing to consider is what return you are getting on your cash and the mitigation of counterparty risk. Holding cash therefore, isn’t entirely without risk and in itself represents a decision that you are comfortable with what risk it represents in the context of your portfolio.
By layering deposits in an underlying pool, the cash exposure is spread as it is not held with one but with a number of underlying banks. Placing cash over a number of maturities allows investors to benefit as longer-dated maturities will usually attract higher yields and clients benefit from these enhanced returns.
For investors with an appetite for speculating in the foreign exchange market, their cash can be put to work while maintaining liquidity. The market trades globally and positions can be taken and traded in a very short period of time. For instance if an investor thinks the pound is going to weaken, they would sell sterling and buy US dollars, thereby participating in any upside benefit from a currency move, while earning interest on the purchased currency.
Cash provides flexibility. If an investor were to buy a line of Google stock and the value of the shares increases they can sell the position (with embedded profit) and go back into cash until they wish to enter the market again. Strategic investors will do just this, actively keeping cash aside to allow them to finesse their timing in entering the market to take maximum advantage of opportunistic investments in moving markets.
Holding cash in a portfolio can provide benefits for active traders as well as investors with a lower risk profile. It has an important role to play as cash is an antidote to market volatility. Although the natural levels are dependent on the individual investment objectives of a client and risk appetite, the important role of cash providing a buffer in portfolios is apparent.
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