The Experts: Should You Keep Cash in Your Portfolio?

May 9, 2013, 12:20 p.m. ET
Article from http://online.wsj.com/article/SB10001424127887324744104578471740280677464.html

Besides keeping some in an emergency fund, should the average investor have an allocation to cash and cash equivalents in an investment portfolio? The Wall Street Journal put this question to The Experts, an exclusive group of industry and thought leaders who engage in in-depth online discussions of topics from the print Report. This question relates to a recent article that discussed the merits of keeping cash in a stock fund's portfolio and formed the basis of a discussion in The Experts stream on Wednesday, May 8.

 The Experts will discuss topics raised in this month's Wealth Management Report and other Wall Street Journal Reports. Find the finance Experts online at WSJ.com/WealthReport.

Also be sure to watch three wealth-management thought leaders—Morningstar's Director of Personal Finance Christine Benz (@Christine_Benz), American Association of Individual Investors Vice President Charles Rotblut (@CharlesRotblut) and Portfolio Solutions Founder Rick Ferri (@Rick_Ferri)—speak about succeeding as a do-it-yourself investor in a video chat that aired on Monday, May 6.

Michelle Perry Higgins: In a Word, Absolutely.

In my opinion, absolutely. My rule of thumb for investors is that if you think you may need the funds within the next three years, then those dollars should probably be left in cash or cash equivalents. For example, if you plan to tap into your portfolio within the next few years for a home purchase, college or income needs, my advice would be to keep the funds in cash and call it a day. You can't afford to risk losing money in the stock or bond market with dollars you might actually need to have in hand within a few years. The stock market is notoriously good at tempting you to move out of cash and up the risk curve.

Michelle Perry Higgins (@RetirementMPH) is a financial planner and principal at California Financial Advisors.

Matt Hougan: In a Word, No.

No. Put your money to work.

Matt Hougan (@Matt_Hougan) is president of ETF analytics and global head of editorial for IndexUniverse LLC.

Tom Brakke: Cash Lets You Respond to Opportunities

For investors who take a fully passive approach, it's probably not necessary. I think everyone else should have higher levels of cash today than they generally do.

That may seem counterintuitive given the low rates on cash, but cash provides flexibility during times when markets come under pressure. Being fully invested sounds great, but it prevents you from responding to opportunities.

Central banks around the world have driven the returns on cash to zero, and have caused distortions in the prices of more volatile assets. No one knows whether those policies will lead to nirvana or catastrophe, although we will undoubtedly end up somewhere in between those extremes. Sacrificing a little upside by holding extra cash right now is a good trade for having a cushion if this grand experiment goes awry.

(If you want to read a longer article on this topic, check out "Cash as Trash, Cash as King, and Cash as a Weapon," from the CFA Institute.)

Tom Brakke (@researchpuzzler) is a consultant, writer and investment adviser who specializes in the analysis of investment decision making and the communication of investment ideas.Rick Ferri: Cash Doesn't Earn a Thing

Cash isn't a good investment because after taxes and inflation, it doesn't earn anything. Today, it's actually a bad investment because inflation is higher than the return on cash.

Cash outside an emergency fund is useful if you have a large liability coming up. For example, your high-school senior is heading off to college and you're footing the bill. Personally, I'm stashing cash this year to pay higher taxes next April.

The only other reason to hold cash is if you're trying to time the markets. Good luck with that. I don't do it, which is one reason I have enough money to pay my taxes.

Rick Ferri is founder of Portfolio Solutions LLC and the author of six books on low-cost index fund and ETF investing. His blog is RickFerri.com.

Rafael Pardo: Liquidity Will Keep You From Robbing Peter to Pay Paul

Yes. As its name suggests, your emergency fund is intended (and should only be used) for emergencies, such as covering living expenses after the loss of a job. Once you deviate from this principle and begin raiding your emergency fund for nonemergency purposes (robbing Peter to pay Paul, as it were), you could find yourself in a heap of trouble. For example, an unforeseen investment opportunity is not an emergency, and yet that opportunity may be too good to pass up. To avoid the dilemma of foregoing the opportunity (and thus missing out on a potential gain) or seizing it (and thus potentially and irreversibly depleting your emergency fund), an allocation to cash in your investment portfolio will give you the liquidity to avail yourself of such an opportunity. And in doing so, you won't compromise the cushion you have built with your emergency fund to safeguard against unforeseen contingencies.

Rafael Pardo is the Robert T. Thompson professor of law at Emory University, where he specializes in bankruptcy and commercial law.

George Papadopoulos: You Need Some Cash for When Opportunity Knocks

I always like to have some cash lying around to take advantage of opportunities that may arise suddenly. Market corrections will always occur; you just never know when. With dividends and capital-gain distributions taken in cash and new cash added to portfolios, we find there is usually at least 5% sitting in cash. This cash came in handy in late 2008, of course. It is always easier to rebalance portfolios when you have available cash as it reduces or eliminates your need to sell a position, which increases transactions costs. The last thing we will do is make market timing calls and "go to all cash."

George Papadopoulos (@feeonlyplanner) is a fee-only wealth manager in Novi, Mich., serving affluent individuals and families.

Sheryl Garrett: Don't Think of Cash as an Investment

Put cash in your saving account and investments in your portfolio. The only cash that you may need in your investment portfolio is money to fund distributions, to enable you to take advantage of opportunities, or maybe you've simply met your objective or it's matured and you're awaiting reinvestment. Otherwise, cash is not an investment, and should not be included in your investment portfolio.

Sheryl Garrett (@SherylGarrett) is founder of the Garrett Planning Network Inc.

Greg McBride: Cash Becomes More Important With Age

An allocation to cash makes sense for many investors, regardless of age, as a way to diversify your portfolio, but is increasingly important as investors get closer to retirement. Particularly now, investors may opt for a little more cash at the expense of fixed income, given the nosebleed valuations in government bonds. Even for ultra-aggressive investors, a modest cash allocation gives you some investing ammunition when short-term market volatility reveals attractive bargains.

Greg McBride (@BankrateGreg) is a senior financial analyst and vice president for Bankrate.com, providing analysis and advice on personal finance.

Manisha Thakor: Keep Cash If You'll Use It Within the Next Seven Years

Whether or not you should be holding cash depends upon how you define your "investment portfolio." My personal rule of thumb is that money you know with certainty that you'll need to spend in the next seven years should not be invested in stocks or bonds. Rather it should be parked for safe keeping in cash equivalents (money-market funds, CDs, T-bills, etc.). The reason is that this frees you up to take full advantage of the risk/reward characteristics inherent in equity investing. In plain English, you can swing a little harder because you know you have a cash safety net. So if your definition of your "investment portfolio" is the sum total of funds that you have at your disposal to save and invest, then yes, there absolutely is a place. I also think cash is a fine parking place while you are trying to decide what you want to do, as rushed decisions can easily backfire.

However, if by contrast you are referring to your IRA or your 401(k) as your investment portfolio and you are not within seven years of planning to take distributions, then I prefer to see portfolios fully invested. The way I would temper the inevitable volatility that comes with investing is to take my "risk" on the equity side and using high quality municipals or treasurys (not corporates) on the fixed income side as a buffer. The idea of keeping some "cash on the sidelines" to put to work when opportunities arise to me sounds an awful lot like market timing—something that I view as strikingly close to gambling given it's long statistical history of failure.

Manisha Thakor (@ManishaThakor) is founder and chief executive of Santa Fe, N.M.-based MoneyZen Wealth Management LLC.

Larry Zimpleman: Leave Your Allocation at 5% or Less

Unless you are a very conservative investor, I would keep the allocation to cash and cash equivalents to a modest amount—say roughly 5% or less. The primary reason for keeping a cash allocation would be to try to move into and out of the market (i.e. market timing). Studies show consistently that market timing is rarely, if ever, successful. The best approach is to set a long-term asset allocation strategy and stay true to that (unless either your time frame for drawing on the assets changes or your tolerance for risk changes).

Larry D. Zimpleman is chairman, president and chief executive of Principal Financial Group.

Eleanor Blayney: Why and Where You Should Keep Cash

Yes and no. As we CFP professionals love to say, "It depends."

It depends on why and where you are holding this nonemergency cash. It also depends on what else you may be holding—namely, debt.

Take the "why" first. Many of us have short-term financial goals, like saving for a significant vacation in three years, or putting a deposit on a home in the next two years. These kinds of goals—assuming a time frame of five years or less—are suitably held in cash or equivalents in an account separate from emergency money. Keep the two separate so that you can be religious about never tapping the emergency fund except for bona fide, "oh-crap" emergencies. If you mingle the short-term money with the emergency money, before you know it you'll be raiding the emergency fund for things like new furniture or that pesky annual insurance premium you forgot to budget into this month's cash flow.

Now for the "where." It makes little sense to hold cash or cash equivalents in your qualified retirement portfolio, assuming you are not close to retirement or in the withdrawal stage. The primary reason to hold cash is for its liquidity. When you know you're going to need X-dollars in the near future, you want to be invested in something certain to be nominally worth X dollars at that time. Cash in a qualified retirement account loses all the benefits of its liquidity when you cannot withdraw it without paying a penalty.

Finally, consider your liabilities. It rarely makes sense to hold cash at today's negligible interest rates, when you have debt at rates that are more than 2% or 3% of what the cash is earning. If the cash is not needed in the short term (see "why" above), then the smarter investment move is to pay down or off the higher rate debt.

Eleanor Blayney (@EleanorBlayney) is consumer advocate of the Certified Financial Planner Board of Standards.

Charles Rotblut: Think About Your Time Frame

The answer depends on when you intend to spend the cash. If you have a big purchase (e.g. a house, a car, college tuition, etc.) within the next few years, then holding cash or a cash equivalent makes sense. It can also make sense for retirees to hold a few years of anticipated withdrawals in cash to fund withdrawals.

Money not needed for the long term should be allocated to a mixture of stocks and bonds. If a security or fund is sold and you are hoping to reinvest the proceeds at lower prices, set a deadline for doing so. For example, if you think stock prices will dip over the summer, set a deadline to invest the cash no later than Aug. 31. This gives you some flexibility, but will prevent you from staying in cash too long.

Charles Rotblut (@charlesrotblut) is a vice president with the American Association of Individual Investors.

Terrance Odean: How's Your Tolerance for Risk?

Besides the emergency fund, most investors should not hold a large portion of their investment portfolio in cash for liquidity purposes. Investors with higher risk aversion or shorter investment horizons may want to hold a portion of their portfolio in low-risk or risk-free assets (e.g., T-bills).

Terrance Odean is the Rudd Family Foundation professor and chair of the finance group at the Haas School of Business at the University of California, Berkeley.



May 9, 2013, 12:20 p.m. ET
Article from http://online.wsj.com/article/SB10001424127887324744104578471740280677464.html

The One Safe Investment and Why You Never Hear About It

BY: ZVI BODIE
Making Sense -- May 10, 2013 at 4:40 PM EDT
Article from http://www.pbs.org/newshour/rundown/2013/05/the-one-safe-investment-and-why-you-never-hear-about-it-from-financial-advisors.html

Economist Zvi Bodie, perhaps the country's foremost expert on pension finance, insists that every American at least consider an investment that financial advisors almost never mention.

Photo by Peter Gridley/Getty Images.

A note from Paul Solman: Zvi Bodie has influenced my thinking about financial economics for 20 years. He has also been my trusted -- and extremely wise -- financial advisor for most of that time. And we have featured him often in stories about America's pension crisis on PBS NewsHour: corporate pension sleight-of-hand and public pension mismanagement, though my favorite Bodie appearance came when he helped us explain the housing Crash of '08, many months before the eventual Lehman collapse.

I regularly beseech Zvi to contribute to this page. Occasionally, he deigns to do so. Today is one of those occasions.

Zvi Bodie: Recently, Paul Sullivan wrote in his Wealth Matters column about financial advisors' increasing interest in technology. He raises two questions about expanded use of technology: Will it help advisers do their job better? And will it be better for clients or confuse and frustrate them? A friend asked me how I would answer those questions. I thought Making Sense readers might be interested too.

Remember the old saw about computer forecasting models? GIGO -- Garbage In, Garbage Out. Technology can make good advice more accessible and less costly, but it cannot turn bad advice into good advice. If the technology is designed to pitch some investment service that is not in the best interest of clients, employing sophisticated technology and interactive software will only serve to deceive the client more efficiently. Fancy software is not a substitute for trustworthiness and good science.

Let me give an example to make clear what I mean. As many of you know if you've read earlier posts of mine on I Bonds or how to pick a financial advisor, I recommend that for people concerned about preserving the purchasing power of their savings, an investment program should start with the purchase of US Treasury Series I Savings Bonds, of which you can purchase up to $10,000 per year per person.

To quote the Treasury Department's write-up online, which I urge everyone to read in full:

"You can cash them in after one year. But if you cash them in before five years, you lose the last three months of interest. (If you cash in an I Bond after 18 months, you get the first 15 months of interest.)"

I Bonds provide the ultimate in long-run liquid financial security to residents of the U.S. An investor in these bonds cannot lose any money or any purchasing power for up to 30 years, despite either inflation or deflation. They provide a return at least equal to the rate of inflation and, often, have paid a "premium" of interest above and beyond inflation.

At the moment, because of historically low interest rates, that premium is zero, but it is reset every six months. If, in September (or the following March or a year from September, etc.), new I Bonds do offer a premium, you can sell the current ones and use the money to buy the new ones. The U.S. Treasury started issuing I Bonds in 1998, and over the intervening 15 years technological improvements have made it easier than ever for people of modest means to purchase them online through TreasuryDirect.gov and keep track of their increasing value, a value that by the terms of the bonds keeps pace with inflation.

You might wonder why a bond that pays, at the moment, only the rate of inflation, is a good investment. The answer is simple. Compare it to an equivalent investment, issued by the very same U.S. Treasury, that is not inflation-protected. The equivalent would be a six-month Treasury "bill." It is paying less than 1/100th of a percent at the moment. Since inflation is running at 1.8 percent right now and an I Bond automatically pays you the inflation rate, the I Bond would seem to be rather obviously the debt instrument of choice.

Yet despite their clear value as a safe and liquid anchor for any investment portfolio, few clients of investment advisors even know of the existence of I Bonds. Bona fide advisors who are truly fiduciaries serving the best interest of their clients would inform them about I Bonds, direct them to the U.S. Treasury's TreasuryDirect.gov website, and assist them in setting up accounts for themselves and their children. To the best of my knowledge, no major investment advisory firm in the U.S. does this.

When the chief financial officer of a West Coast nonprofit followed my counsel on this page (see "How to Find a Financial Advisor, Step by Step") he asked the several financial advisors he auditioned if I Bonds were part of their advice. He told Paul Solman that not one of the advisors said they were. That is not a function of their mastery -- or lack of mastery -- of technology. It can only be explained in terms of self-interest or ignorance. There is no profit margin in advising clients to purchase I Bonds. And of course, if you don't know about them, how can you suggest them?

Instead of practicing prudence, however, investment advisors tend to deploy the latest innovations in digital technology to promote the products of those with an even greater incentive to steer you wrong -- members of the financial services industry. That industry specializes in pushing the product with the highest profit margin, stocks. The content of financial services materials is often deceptive and in some cases flatly contradicts what financial economists recommend as sound.

As I have shown repeatedly on this website and Making Sense broadcasts, no matter how broadly diversified a portfolio of stocks, conventional bonds, and cash may be, it cannot offer the protection afforded by I Bonds. The proposition that the risk of stocks diminishes with the length of one's time horizon is a fallacy, as is the notion that stocks are a hedge against the risk of inflation. I figure it's about time for every American to be told -- or in the case of the Making Sense audience, told again -- about I Bonds.

Zvi Bodie appeared in this 2011 story on assumptions used for public pension funds.

Zvi Bodie is a professor of management at Boston University. His books include "The Future of Life Cycle Saving" and "Investing and Foundations of Pension Finance." For more, see his website. Zvi's videos are on his YouTube Channel.

This entry is cross-posted on the Rundown- NewsHour's blog of news and insight. 

ZVI BODIE

Making Sense -- May 10, 2013 at 4:40 PM EDT

Article from http://www.pbs.org/newshour/rundown/2013/05/the-one-safe-investment-and-why-you-never-hear-about-it-from-financial-advisors.html

Edward Jones column: Investors can learn from swimmers' diets

Published: May 8, 2013 9:04 PM
From: http://www.stevenspointjournal.com/article/

Summer isn’t here yet, but it’s getting close. And for many people, the arrival of summer means it’s time for swimming at the local pool or lake. If you’re just a casual swimmer, you probably don’t have to adjust your diet before jumping in. But that’s not the case with competitive swimmers, who must constantly watch what they eat and drink, particularly in the days and hours preceding their races. While you might not ever have to concern yourself with your 400-meter individual medley “splits,” you can learn a lot from swimmers’ consumption patterns — particularly if you’re an investor.

For starters, to sustain energy and stamina for a relatively long period of time, competitive swimmers need to eat easy-to-digest carbohydrates such as whole wheat, whole grains, apples and bananas. When you invest, you want to build a portfolio that is capable of “going the distance.” Consequently, you need investments that provide carbohydrate-type benefits — in other words, investments with the potential to fuel a long-term investment strategy. Such a strategy usually involves owning a mix of high-quality stocks, bonds, government securities and certificates of deposit. By owning these vehicles, in proportions appropriate for your risk tolerance and time horizon, you can help yourself make progress toward your financial goals — and lessen the risk of running out of energy “mid-stream.”

Of course, competitive swimmers have to be diligent not just in what they do eat but also in what they don’t. That’s why they avoid sweets, such as sodas and desserts, when it’s close to race time. These items do not provide lasting energy — in fact, they actually sap energy once the sugar wears off. As an investor, you, too, need to avoid the temptation of “sweets” in the form of high-yield or “hot” investment vehicles. You might find some of these investments to be alluring, but you will need to carefully weigh the extra risks involved. For many people, these types of investments might not provide the long-term stability needed to help maintain a healthy, productive investment portfolio.

While what swimmers eat, or don’t eat, is important to them, their drinking habits are also crucial. The competitive environment — warm pool water, high air temperatures and high humidity — can quickly lead to dehydration, so swimmers need to drink sizable amounts of water and sports drinks before and during practice. And you, as an investor, need your own type of liquidity, for at least two reasons. First, you need enough cash or cash equivalents to take advantage of new investment opportunities as they arise; without the ability to add new investments, your portfolio could start to “dehydrate.” Second, you need enough liquid investments — specifically, low-risk vehicles that offer preservation of principal — to create an emergency fund, ideally containing six to 12 months’ worth of living expenses. Without such a fund, you might be forced to dip into long-term investments to pay for unexpected costs, such as a major car repair, a new furnace or a large bill from the dentist.

So the next time you see competitive swimmers churning through their lanes, give a thought as to the type of diet that is helping propel them along — and think of the similarities to the type of “fueling” you’ll need to keep your investment strategy moving forward.

This article was written by Edward Jones for use by your local Edward Jones financial adviser. Glenn Helminiak of Edward Jones Investments can be reached at 715-344-0337, or visit his office at 2817 Post Road, Suite A, Whiting.

Published: May 8, 2013 9:04 PM
From: http://www.stevenspointjournal.com/article/