Interest rates on cash are currently near zero. Were it not for subsidies provided by mutual fund companies, most money market funds would carry a negative return. In other words, they cost more to run than they earn. This situation is unlikely to change any time soon since the Federal Reserve Board has vowed to keep interest rates reduced to nominal levels well into 2014. So the logical question is “why should I keep cash in my portfolio”?
IAM encourages clients to keep “rainy day” reserves outside of their long-term, managed investment portfolios. These are funds that can be used for unexpected events, or occasional occurrences, like purchasing a car or a boat. If you have such funds to draw on, you’re unlikely to have to liquidate a long-term security in an adverse market.
Sometimes clients want to keep some “rainy day” reserves in their managed accounts. In such cases, we encourage them to set a “cash buffer”. This is an amount below which we will not draw cash reserves when purchasing securities, so there is always a balance in place if needed.
Retired clients frequently establish monthly distribution plans and need buffers to make sure those payments are made in a timely manner. In addition, cash is needed to pay quarterly advisory fees.
There are also investment circumstances in which one might decide to maintain available cash. When equity markets are at high levels, it’s often good to take profits and hold sales proceeds until prices get more reasonable. Also, short-term cash may be maintained when new investment selections are in process and close to being purchased in portfolios.
Have you heard the term “near cash”? This term is commonly used when bonds are nearing maturity. (For a primer on bonds please reread our January 3, 2012 blog article Do Bonds Still Serve a Purpose in Investment Portfolios?) At IAM we build bond ladders. This means we purchase issues up to 6 or 7 years in length, staggering them by year. We try to cover all maturities in that timeframe. The result is a client will nearly always have an issue within 18 months of paying back its principal. This “near cash” often factors into client calculations of cash reserves and allows money to earn greater interest.
The bottom line on this subject is cash is of little value today unless you need it for safety, distribution requirements, or near-term investment timing. As of mid-August, IAM’s average cash balance is 6.5% of managed assets. Some of these funds serve as cash buffers. The remainder is being held for potential bond or equity purchases.
We always maintain a bond list showing portfolios needing additional fixed income purchases. These are often slated as replacement buys for bonds that have recently matured or been redeemed. Right now we’re looking to make 22 purchases. Several times a week we search through hundreds of available bonds searching for those with the best characteristics.
Our plan for the majority of current cash is to purchase additional equities at what we perceive to be attractive valuations. Right now we have three “blue chip” names under consideration for inclusion in IAM’s SELECT List. Should any or all of these issues be worthy of consideration by our Investment Committee and then approved for purchase, we will deploy reserves appropriately by buying shares suited to individual account needs. It’s expected that some of these equities will have income yields substantially higher than those of money market funds.
In conclusion, we believe cash does still serve a purpose in investment portfolios but excess cash should be deployed in more productive areas until market conditions warrant a defensive posture.
Any clients wishing to discuss their cash buffers, near cash, or excess cash should contact us so we can make sure we’re incorporating your desires into our investment management process. Otherwise, we will continue to work within the asset allocation guidelines established in your Investment Policy Statement.
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Important Consumer Disclosure
This newsletter is limited to the dissemination of general information pertaining to Investors Asset Management, Inc.’s (“IAM”) investment advisory services and general economic market conditions. This communication contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice, and should not be considered as a solicitation to buy or sell any security or engage in a particular investment strategy. Nothing herein should be construed as legal advice, and you should consult with a qualified attorney before taking any action. Information presented herein is subject to change without notice. Past performance is no guarantee of future results, and there is no guarantee that the views and opinions expressed in this newsletter will come to pass. Individual client needs, asset allocations, and investment strategies differ based on a variety of factors.
The Select List represents all of IAM’s recommendations as of April 18, 2012. The Select Dividend List as of January 24, 2012, represents a select set of IAM’s Select List. The securities discussed herein may appear on IAM’s Select List. A list of all recommendations made by IAM within the immediately preceding one year is available upon request at no charge. IAM is under no obligation to hold any equity position for any time period, and the recommendations on the Select List are subject to change at any time without notice. The Select List should not be considered as personalized investment advice, and the securities information contained therein should not be construed as an endorsement, solicitation, or recommendation to purchase or sell any security. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment on the Select List, or any recommendations in the future, will be profitable.
IAM is an SEC registered investment adviser with its principal place of business in the State of Texas. IAM and its representatives are in compliance with the current registration and notice filing requirements imposed upon registered investment advisers by those states in which IAM maintains clients. IAM may only transact business in those states in which it is noticed filed, or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by IAM with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of IAM, please contact IAM or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about IAM, including fees and services, send for our disclosure brochure as set forth on Form ADV using the contact information herein.
Investors Asset Management, Inc. ¬ 5000 Legacy Drive, Plano, TX 75024 ¬ www.iaminvest.com ¬ 972-985-7162


















