Market turbulence has many investors rethinking how much liquidity is too much or too little for their financial plan.
In 2018 most major stock and bond indexes finished down, and by comparison cash-based instruments—money markets, savings accounts and certificates of deposit (CDs)—had a surprisingly good year.
“There’s no question that cash was a strong-performing asset class in 2018 relative to stocks and bonds,” says Rob Basham, Regional Portfolio Manager for Regions Asset Management. And for investors who have short-term spending needs, adjusting a portfolio toward more liquid assets often makes sense, he says.
Imagining the worst
But even with market volatility in full force and interest rates creeping upward on most liquid assets, he doesn’t see a move to cash as a cure-all for his clients. “We don’t have a specific target allocation to cash as a percentage of an investment portfolio. Rather, we look at each client and ask, what do you need to purchase over the next six or 12 months? What expenses are you looking at? What would an emergency look like for you? And let’s make sure that we build enough liquidity into your portfolio to take care of any of those things. This may include cash, or access to credit, to avoid having to sell stocks and bonds at inopportune times.”
More than one way to save
Regions offers a variety of savings and money market accounts, as well as certificates of deposit that offer FDIC-guaranteed daily compounded interest. Basham advocates that investors explore these options—especially if they expect to need access to cash in the near future. But he advises investors who are planning for the long term to stay the course, even if Wall Street’s recent yo-yo act makes them nervous.
“We don’t know precisely what the market will do over short periods of time. But over longer periods, the best way to meet goals has been to stay invested in the stock and bond markets,” he says. History bears this out. The S&P 500 stock index’s annual return has been up and down on a year-to-year basis, but over the long term it has consistently outperformed cash by a wide margin. Just how much has it outperformed, and how consistently? The S&P 500 has posted average annual returns of 10% in the 92 years between 1926 and 2018.
As Basham puts it, “Cash investments can be great. But if you’ve got time on your side, then stock and bond markets are your friend.”
