Searching for Alpha The Role of Cash

03 Mar Searching for Alpha The Role of Cash

Cash has become another four-letter word for some investors. Sure, it doesn’t earn anything – slightly less than the yield on high-quality, short-term debt – but keeping some immediate liquidity has real-world advantages. (See monthly index returns table below.)

The most pragmatic reason one might need cash is in case of an unexpected expense. If something suddenly comes up, having some money available (perhaps by not reinvesting dividends or interest automatically) is far better than raising the money by selling an investment and incurring potential tax consequences.

There are also some strategic reasons to keep cash on the sidelines. Many investors, shaken to the core after the Global Financial Crisis, are still hesitant to invest in stocks. Keeping some of the portfolio liquid gives them equity exposure and provides psychological comfort, making them feel more at ease.Cash also offers a significant level of flexibility for opportunistic investors. With U.S. markets boasting valuations far higher than the rest of the world, the performance banner will eventually be passed. Having some cash ready to deploy not only reduces domestic exposure, it also empowers you for a quick reallocation when the tide turns.