Why? Because on average more than half of their portfolios are in cash, earning negative real returns, according to the results of BlackRock's first world-wide survey of investor attitudes and behaviors.
Specifically, 48% of U.S. respondents' investible assets are in cash deposit and savings accounts, and an additional 12% are in money-market accounts and certificates of deposit. Despite their widespread pessimism about meeting long-term financial goals, half of respondents intend to stand pat over the coming year, while another third actually plan to increase their cash holdings.
"I find this to be such a big predicament," says Mr. Kapito. Investors were understandably unnerved by the financial crisis of 2008, he says, but with so much money parked on the sidelines "how could you possibly be saving enough for the future and earning a rate of return that will be above inflation?"
It's a fair question. And it begets another: How much cash, if any, is appropriate in a portfolio?
Financial advisers hold widely divergent opinions, but it's possible to draw some broad parameters:
Emergencies: It's essential to keep several months' worth of living expenses in a checking or savings account where your principal is insured (up to FDIC coverage limits) and you have access to the money "on demand." Such a "rainy day" fund can be tapped to pay routine bills or unexpected medical costs if, for example, you suddenly lose your job or fall ill.
Short-term goals: For expenses you know you're likely to incur in the next few years—for a house, car, wedding or big vacation, say—it makes sense to have a second cash account that's fairly liquid and offers little to no principal risk. Think money-market funds (liquid, though not FDIC-insured) and CDs (insured, but with penalties for early withdrawal).
Fire sales: Some investors like to keep a little cash on hand to scoop up stocks at "bargain" prices should markets tumble, especially at times like these, when equity indexes are near record highs.
Diversification: Bonds are the traditional go-to asset for diversifying a stock portfolio and reducing your overall risk of losses. These days many investors are using a combination of shorter-term bonds and cash for ballast in anticipation of rising interest rates. (When interest rates rise bond prices typically fall, with longer-term bonds suffering the steepest price drops.)
Retirees might want to keep 12 months of living expenses in a cash account plus 2% of their portfolios in cash as part of a "second tier of emergency liquidity," says Harold Evensky, a financial-planning professor at Texas Tech University and president of Evensky & Katz Wealth Management of Coral Gables, Fla.
"When investors can see their grocery money sitting in cash they are much more comfortable hanging in through a bear market than if it were part of the investment portfolio," he adds.
Peace of mind: Besides your ability to handle losses, there's also your willingness to do so. Investors who are especially risk-averse might be tempted to hold more cash than necessary so they can sleep better at night.
Source: Carolyn Geer, Wall Street Journal
The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.
The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville. The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.
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