Why So Much Cash?


Posted in: Economics, General, Stock Market, Thought of the Week

The S&P 500 has been quite volatile since the start of the New Year, and it seems like every market pundit in the media keeps pointing to an impeding correction after the meteoric rise in equities in 2013. Over the past three weeks, our Investment Committee has been building up cash in the Conservative Income portfolio for this very reason.  Although our Investment Committee remains bullish for the long-term, the setup for a correction looks ready for a few reasons:

  • There has not been a real correction in over two years, and they typically occur more frequently.
  • Many stocks began the year relatively overvalued, and valuation can often spark a correction.
  • Although tough to quantify, it feels as if investors are looking for reasons to sell and lock in profits from 2013.

Corrections are a healthy component to equity markets because they usually target stocks that are often considered overvalued. It’s too early to tell if we are in a real correction, defined as a 10-15% move downward, but if we do ultimately see one then the cash will be used towards new opportunities to profit from the fear and panic of others.

The primary objective of the Conservative Income portfolio is capital preservation over the long-run. Oftentimes, our Investment Committee will make changes to the portfolio to reflect this goal. For example, during the financial crisis in 2008, the S&P 500 lost approximately 37%, and the Conservative Income portfolio was slightly positive for the year because the Investment Committee had no money invested in equities. The tradeoff is that our Investment Committee will likely not capture all of the upside during years like 2013. These tactical moves are made in order to lock in gains and patiently wait for new opportunities to profit from the fear and panic of others.

To sum it up, our Investment Committee would rather give up insignificant performance on the upside in order to prevent too much exposure to the downside by owning expensive stocks. Even though our Investment Committee remains bullish on equities over the next 7-10 years, there is no need to take outsized risks in the Conservative Income portfolio.

Read this week’s Thought of the Week to learn more about the possible correction we may face in the near future.

Click Here for the Weekly Thought

As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.