By TIM GRANT
Pittsburgh Post-Gazette
At a very practical level, cash is a relatively safe investment that rarely loses its nominal value, unlike stocks and long-term bonds, which could lose value and, in the worst of circumstances, become worthless. At a more strategic level, cash makes it possible for an investor to buy other assets when prices take a dive.
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Cash is a valuable asset class," said Ron Rowland, CEO of Capital Cities in Austin, Texas. "Only the people who had cash could take advantage of bargains eight months ago. There's always room for cash in a portfolio. It's a matter of degree. One of the beautiful things about cash is it's the ultimate diversifier. It's there when you need it."
Although cash-related assets such as U.S. Treasury bills, CDs and money market funds are paying close to 0 percent, when compared to asset classes that took a deep plunge in the market meltdown last year, 0 percent is still a better return than losing money.
As measured by the 90-day U.S. Treasury bill,
cash has returned 17.3 percent over the past five years, said Robert Katch, president of Manchester Financial in Westlake Village, Calif. In fact, he said cash has beat stocks over the past five and 10 years, although that time frame is based on an end point that is highly unfavorable for stocks.
Over 15 years, stocks have provided more than twice the return -- 180 percent versus 80 percent for cash.
"Cash," Katch said, "is like a tank, and stocks are like a Ferrari; and investors jump back and forth between the two when they get bored with the tank or crash the Ferrari. They should just buy a Volvo instead."
The ordinary rules of stock and mutual fund investing seem to no longer apply now that the buy-and-hold strategy is no longer a sure thing. So, if the idea is to preserve capital and temporarily hide from uncertain market conditions, what could be safer than holding a pile of cold cash? But for how long? And to what extent?
Some financial advisers say cash tends to get misused: Its job is only to transfer its current purchasing power into the future -- not necessarily to increase its purchasing power. That is a role for which stocks are best.
"In your investment account, there should be no cash," said Jerry Miccolis, a senior financial adviser at Brinton Eaton Wealth Advisors in Madison, N.J. "The purpose of your investment account is to secure your financial future. The biggest risk in your investment life is inflation. Cash is one of the few asset classes that has virtually no chance of helping you beat inflation."
According to Bankrate.com, the average yield on a six-month certificate of deposit currently stands at 1.33 percent.
For an account balance of $10,000, that amounts to a pitiful $133 in annual interest income.
Most financial advisers recommend having a cash cushion of six to 12 months in living expenses.Unless an individual plans to spend his or her entire emergency fund in a hurry, some experts say there's no reason the entire amount needs to be held in cash.
Charlie Smith, chief investment officer at Fort Pitt Capital in Green Tree, Pa., said the smart money will stay invested in stocks.
"If you believe we are in a long-term deflationary collapse, you are fighting the full faith and credit of the Federal Reserve and the U.S. Treasury," he said. "The Fed and the Treasury have said they will do everything they can to prevent deflation. I'm not going to bet against policymakers. They've got the power to print money."
Still, some experts say at least for the short term, there's nothing wrong with sitting on a hoard of cash, especially if your tolerance for risk is low.
"There's nothing wrong with waiting for the next best investment. You don't have to be invested all the time, especially if you think other investments will drop in price," said Doug Thorburn, a financial planner at Income Capital Growth Strategies in Los Angeles.
"Just think of how well you would have done if you sold everything in October 2007. It would have been a great time to get into cash even if you earned 0 percent. You could have bought twice the amount of stock and real estate in March 2009."
