Credit: Shutterstock photoWith just 3 days left until the referendum, the opinion polls are neck and neck on whether Britain should leave the European Union. As markets await the decision, volatility has garnered a considerable amount of attention. Investors are frantically parking themselves in safe havens and volatility hedging instruments to prepare for the fallout from the vote. We have seen Gold and the S&P 500 Volatility Index (VIX) spike in value last week, but in the event that Brexit sparks a new crisis, cash might be the safest investment.
In a recent study titled “No Bulls for Bear Mountain,” Bank of American Merrill Lynch reported investors have amassed the largest stockpile of cash since 2001 and have cut equity holdings to a four-year low. As bond yields continue to fall and an increasing amount of countries are turning to negative interest rates, investors have been more likely to hold cash. It’s the latest piece of evidence that the public is nervous about the weak economic outlook and have not forgotten the devastation of the 2008 Financial Crisis.
Cash is King
When global sentiment is weak, the financial market shifts its focus to less risky assets for safety. Gold, Treasury Bonds and Volatility Indexes are popular destinations, but lately cash is king. In less than a year, cash and money market funds have been the world’s most popular assets.
According to Bank of America Merrill Lynch, cash has attracted $208 billions of inflows with stocks and bonds amassing $53 billion combined. The same survey claims fund manager’s cash holdings now make up 5.7% of their portfolios, up from previous months. The biggest threats lately have been the pending Brexit vote followed by skepticism surrounding central bank policy and interest rates.
Cash is not necessarily having stacks of fiat money sitting under your mattress or idle in a checking account. It can come in the form of low interest bearing savings account, money market account, or shorter term Treasuries. While holding too much is considered a risk and is inadvisable, it still warrants a place in your portfolio.
Having money shields you from the ups and downs of the stock and bond market. The S&P 500 ended 2015 down 1%, helping to make the case that holding cash isn’t all that bad. A small cash position is also viewed as a preventative cushion held for peace of mind. Modern psychology has found that losing money produces more emotions than making money, so having an asset like cash that remains relatively unchanged alleviates that stress.
Interest Rates Are Low
Cash is all the craze right now even though interest rates remain low, meaning money in the bank earns virtually nothing. Despite a small bump from the Federal Reserve late last year, banks aren’t paying meaningful interest on deposits. When you take inflation into account money actually losses its value. However, investors don’t care about that at the moment. They are far more concerned about preserving wealth and avoiding the misfortunes from the past few years.
2008 is Gone but Not Forgotten
In some ways the recent infatuation with cash is a byproduct of the Great Recession which crushed millions of American’s investment accounts. The fallout is still fresh on American’s mind and influences how people make investment decisions today. If the global turmoil results in a new recession cash is an ideal asset to balance your portfolio. Investment guru, Mohamed El-Erian recently advised holding 25% to 30% of your wealth in cash. The response to increasing volatility is not to underestimate the power of cash but to embrace it for its agility and resilience in the market.
Concluding Remarks
Cash has begun to look better lately when compared to the glut of problems everywhere else. By the end of this month we will have seen interest rates unchanged, global economic outlook cut and a vote which will decide the fate of the U.K. and European Union. As a result, the S&P 500 (^GSPC) is down nearly 1% halfway through June with a strong possibility of falling further by the end of this week. So while cash shouldn’t be the only thing in your portfolio, there is no harm in holding some through this current wave of volatility.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
