Finance Cash is king – and a whole lot more You’ve probably heard the phrase “cash is king” before. It’s more than trite advice. During times of economic and political uncertainty, cash is stability, flexibility, freedom, negotiating power and a good night’s sleep all rolled into one. We briefly spoke above about the benefit of having, say, six months of everyday living expenses in an easily accessible account. If and when trouble hits, it feels a lot better when you can pick up some groceries, pay your phone bill and take care of your monthly car insurance payment with cash on hand, rather than selling the family silver, or the modern equivalent – the investments in your retirement portfolio. Within your portfolio, it also makes sense to pay attention to how much cash (or easily liquidated cash equivalents, such as GICs or a money market fund) you have on hand. Keeping a small cash reserve – say, between 10% and 15% of your portfolio – will allow you to seize mispriced or overlooked opportunities during times of market turmoil. In fact, Warren Buffett, Carl Ichan, John Templeton and other famous investors have made billions for their shareholders by pursuing such a strategy after a number of crises and market panics. Even when it comes to evaluating stock investments, it often pays well to look at how much cash a given company has on hand. Much like it does with individuals, a company with ample cash reserves has the flexibility to pay bills, take advantage of opportunities and survive difficult times. Such cash-rich companies can be a valuable anchor for your portfolio; because investors are less concerned about their financial health, their share prices tend to drop less precipitously during stock market downturns. Keep in mind, however, that when it comes to cash, there can be too much of a good thing. Over the long term, holding too much of your portfolio in cash can mean reduced growth potential – particularly during times of high inflation when the value of that cash is dropping year over year. As good as gold We spoke at length, in our previous issue, about the role of gold and other precious metals, so there’s no need to belabour the point here. Suffice it to say that in a world of increasing geopolitical uncertainty, rising inflation and massive (and growing) government debt, there are plenty of good reasons why you might want to allocate at least a small portion of your portfolio to precious metals. Here’s another advantage: over longer time horizons, there’s some very good evidence suggesting that including an allocation to gold can improve the risk/reward level of your overall portfolio. This chart makes the point more clear. It shows how an allocation to gold could have had an impact on both the performance (x axis) and the volatility (y axis) of a hypothetical 50/50 stock and bond portfolio over the past 50 years or so. You’ll notice that the Sharpe Ratio (a technical measurement of how much performance you receive for how much risk you accept; the higher the number, the better the risk/reward tradeoff) is at its highest point with a gold allocation of 14-18%. Keep in mind that the exact optimal allocation for your own portfolio will depend largely on the other assets which you have in it: if you have a greater allocation to bonds (and therefore, more exposure to interest rate risk), you’d likely enjoy greater benefits from adding gold than investors who emphasize dividend-paying stocks, or real estate, or any combination of other assets. But you get the general idea: an allocation to gold can reduce overall portfolio volatility as well as enhance returns. As we mentioned in our more detailed examination of gold, if you’re interested in adding precious metals to your portfolio, be aware that they can be quite volatile – just look at how the prices have jumped around since the start of the year. Make sure to think carefully about the appropriate allocation for you, and do your homework before you put your money to work. OPTIMAL ZONE 14%-18% 5% 0.35 0.40 0.45 0.50 0.55 0.60 0.65 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% Portfolio Allocation to Gold Sharpe Ratio Optimal Gold Allocation for Risk-adjusted Returns January 1970 - April 2024 Source: Robert J. Schiller; Reuters Eikon; Incrementum AG 30 | www.snowbirds.org
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