Tim Hoyle, CFA, Co-Chief Investment Officer
thoyle@haverfordquality.com
Should I Raise Cash?
This question, or some variant of it, has been asked of me and my colleagues every day of the Great Lockdown. This simple question is likely the single most difficult question in all of wealth management. History demonstrates an upward sloping line for investors; there is roughly a 70% chance that your investments will be worth more next year than last year, and a 90% chance your investments will yield positive results over the next decade. But next month, and the month after that? The odds fall to 59% that stocks will be higher in any one month1. But knowing the odds only partly helps to answer this question.
Raising cash in attempt to time the market is something we never recommend. But opportunistically raising cash within the context of a financial plan is often a wise course of action. The right amount of cash can be derived through both a budgetary analysis and a behavioral analysis. At Haverford, we work with our clients to construct a realistic picture of future cash needs and then recommend having at least 12-18 months of expected cash needs available at all times. This cash buffer, plus the dividend and interest income, will help to mitigate the need to sell assets at depressed levels. The typical market correction (a 10% -20% decline) usually rights itself within six months, while the typical recessionary bear market can take over three years to fully recover losses.
Beyond the simple budgetary equation, the behavioral analysis for cash reserves becomes more complex. Some of the best advice I ever heard from my colleagues to the question “how much cash and/or fixed income should I have?” is the least amount possible in order to ensure you stay invested in equites for the long-term. You can invert that advice to state that our job at Haverford is to ensure our clients have the maximal exposure to equities that still allows them to sleep well at night. Equities have been, and we believe will continue to be, the best way to generate wealth and maintain purchasing power over time.
One of the most difficult questions in all of wealth management deserves more than a three-paragraph answer. And the answer is often an evolving target, a number that has to be continually reassessed and tested. It gives me great pleasure to guarantee you (because we can’t guarantee much in this business) that Haverford’s team is here to help you with the answer. Please call us to talk it through. No answer will be exact or perfect, but the process will be beneficial and should increase your odds of long-term success.
