Put Cash Back in Your Portfolio

It’s time to consider putting cash back into your portfolio, according to a recent article in The Wall Street Journal.

“The value of cash was demonstrated in the first quarter,” the article reported, adding that both stocks and bonds lost money during that period for the first time since the failure of Lehman in 2008. Cash and “near-cash” products, the article points out, have three properties that should appeal to investors at the moment: an above-inflation yield; a “guaranteed value to cushion a portfolio; and “the firepower to buy back after a dip.”

The article compares returns on cash and bonds, pointing out that a 1-year Treasury bond will yield 2%, but that locking up cash in a 10-year Treasury bond would yield only an additional 0.8 %. “For 25 years,” the article explains, “bonds acted as a form of insurance for investors, with their value usually rising—so yield falling—when share prices dropped.” But investors might be taking this long-standing inverse bond-equity link for granted, the article suggests. There are reasons to believe that “both the short-term cushion provided by bond when equities drop and the longer-run gains from falling yields could be coming to an end. If they do, cash will be a better way to shield a portfolio against stock price falls than bonds.”