Is Cash Really King?
You’ve probably heard before that “Cash is king.” I have certainly heard it more during the last few months where we’ve endured the COVID-19 crisis. Volatility, uncertainty, and fear has been high. The value of cash, safety, and liquidity has increased. But, the question remains, “Is Cash Really King?”
Cash is King…for Some
It’s so easy for phrases like these to be taken out of context. Or, a message meant for some may not be the message for all. The phrase “Cash is king” is a fitting example of this. Who exactly is this message for? Does it apply equally to everyone?
Well, it shouldn’t. There are certainly groups of people that need to have cash on hand, especially in a time of crisis, but I would argue there are also groups that have no need for a large allocation to cash.
For those that own a business, have short-term uncertainty in their occupation, or do not already have an ample cash emergency fund, cash really is king. The events that have unfolded in the past couple of months have proven that to be true.
Some business owners have been shut down completely. Many workers have been unable to earn a living. Expenses for food, rent, and utilities continue, but revenue and paychecks have ceased. This is a great argument that cash, as much as 6 months of expenses, should be king for these folks.
Money Managers vs. Individual Investors
A March 19, 2020 article featured on CNBC.com states that “Fund managers have a message: Cash is king.” The article lists a key point that “many investors are selling everything from stocks to bonds to gold in order to raise cash.”
Looking back, that doesn’t seem to have been a wise move. According to Yahoo Finance, the S&P 500 has increased over 22% from March 19th through May 18th, but I digress.
The point to emphasize here is that a professional money manager is much different than an individual investor. Professional money managers, like the ones featured in the article, are constantly looking for opportunities to buy or sell, and they have the expertise to do so.
The common investor, on the other hand, may read an article like the one on CNBC.com and be influenced to sell their stocks, mutual funds, etc. The problem is that those investors usually stay “out of the market” for too long and miss the opportunities that do arise. The result is that the individual investor gets hurt financially.
However, not all professional managers in the article felt that cash is king. To his credit, Kelvin Tay, a regional chief investment officer of UBS Global Wealth Management, stated that “Raising cash when the S&P 500 is already off 28% from its peak doesn’t seem the most appropriate strategy now.”
Is Cash King for the Retiree?
Some may argue that cash is of even more value for the retiree. However, I would counter that the answer to that question depends entirely on the individual’s situation. Is cash king for a retiree that lives completely off income from pensions and Social Security Retirement Benefits and has no near-term need for withdrawals from his/her portfolio?
In fact, many of the risks that apply to working individuals do not apply to retirees. For example, a retiree does not face the risk of being laid off. Also, a retiree over the age of 59 ½ does not face the risk of penalties if they need to access money from a 401(k) or Traditional IRA. In that sense, a retiree has much more liquidity than someone that has not attained age 59 ½.
The biggest risk that for retirees who are currently, or will soon be, taking distributions from their portfolios is market risk, or volatility risk. For someone that receives regular distributions from their portfolio, major down markets are certainly a concern. For those individuals, I would suggest the right amount of cash and/or other less volatile investments is the proper solution.
Does that mean I think a retiree in the “distribution phase” should have 50%, 75%, or 100% of his/her portfolio in cash? No, not necessarily.
A customized income plan should be segmented by the expected timing of the withdrawals. Withdrawals expected in the short-term should be invested in a very safe and liquid position. For withdrawals expected in the mid-term (2-10 years), it can be argued that investments aiming at a slightly higher return, with slightly more volatility risk, could be appropriate.
And lastly, for withdrawals that are expected over ten years from now, I would argue that investments, like stocks, that have a higher expected long-term return, along with higher short-term volatility, are appropriate.
Is cash really king? I suppose the answer is that it depends on your personal situation. But, before you sell your investments to raise cash, you should consider the points made here and speak with a licensed investment professional, preferably one that holds a CERTIFIED FINANCIAL PLANNER™ certificate.
Joe Allaria, CFP®
As featured in The Wall Street Journal, USAToday.com, CNBC.com, Nasdaq.com, and Yahoo Finance.
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