There’s more to cash than you think

CASH

5 POINT SUMMARY OF THIS ARTICLE

1

2

3

4

5

Holding cash is an active allocation choice

You can reflect sustainable values in your allocation to cash

The ‘dry powder’ argument doesn’t stack up

Consider borrowing if you need liquidity

Your wealth includes cash outside your portfolio

Cash appears to be the most straightforward store of wealth. Yet there’s more to think about – from the risk of missing out on higher potential returns from other asset classes to the opportunities available to reflect your personal values.

It’s easy to forget that inflation erodes the purchasing power of money. As the prices of goods and services rise, we can buy less of what we used to be able to afford. Although the rate of inflation is low today, we expect it to increase gradually over the long term as the economy recovers and demand from businesses and consumers picks up.

Interest rates are at record lows and even negative in some countries. They are unlikely to increase any time soon as central banks maintain monetary policies that can stimulate growth. Therefore, the returns from cash savings and short-term government bonds are likely to be negligible for the foreseeable future – and negative after taking inflation into account.

Holding cash is an active choice, and it’s important to consider the decision against the opportunity cost of investing. On rare occasions cash outperforms other asset classes, but only when the conditions are just right. Over the long term, cash is often an unattractive investment, which may drag down a portfolio’s returns as the economy and markets recover.

Holding cash is an active allocation choice

1

You can reflect sustainable values in your allocation to cash

2

As more of us realise our decisions make a difference, sustainable investing is becoming increasingly popular. It’s now possible to ensure that the cash allocations in your portfolio reflect your personal values by choosing money market funds that incorporate environmental, social and governance (ESG) factors into their investment decisions.

The core investment objectives of money market funds are to preserve capital and provide liquidity, so their investment approach naturally aligns with certain ESG principles. However, recently money funds have begun looking at these factors more proactively.

The money funds using ESG criteria invest in commercial paper and other private instruments. These funds specifically look at companies that meet or are adopting high standards in ESG terms.

There is significant demand for ESG money market funds, which is driving growth in this sector and has led to an increasing range of funds available for private investors and corporate treasurers.

The ‘dry powder’ argument doesn’t stack up 

3

Some investors like to hold cash in their portfolios so that they have dry powder to put to work as soon as they spot an opportunity. Yet the reality is that waiting for an attractive entry point often leads to inertia. We end up doing nothing because we’re worried about making the wrong decision. During periods when markets are rising, it may be tempting to wait for a good entry point by keeping your cash rather than investing. But when markets are falling, many investors feel uncomfortable investing in case they suffer immediate losses. This pattern of behaviour can mean that our money remains uninvested.

Over the long term, cash tends to underperform most other asset classes, and investors could miss out on these potential returns if they  don’t invest. When considering entering a market a systematic and disciplined approach can be adopted, which involves investing cash gradually and being fully invested as much as is practically possible.

Consider borrowing if you need liquidity

4

Cash and cash-like investments (such as short-term government bonds and commercial paper) can offer a source of comfort during periods of uncertainty in case you need money quickly. However, with interest rates at record lows, now might be a good time to take advantage of a loan if you need to free up some liquidity.

Rather than selling investments, you could consider borrowing against the value of your portfolio. You retain control of your core portfolio and gain immediate access to funding. 

Meanwhile, some of the economic conditions that are bad news for cash have the opposite effect on debts. They include inflation, which erodes the value of loans over time in the same way that price rises reduce the purchasing power of your cash.

Source: Fitch

Your wealth includes cash outside your portfolio

5

Many of us think about the various assets and investments that make up our wealth in different ways, and the same goes for any cash savings. It’s a common cognitive bias called mental accounting, and it can affect our financial behaviour in unhelpful ways. One side effect is that many people end up with a higher total allocation to cash than they think.

It’s important to consider all your cash holdings together with your investments, and not to segregate them into separate buckets. You’ll then have a more accurate picture of your overall asset allocation, which can help you make better investment decisions as you stay focused on your long-term financial goals.

54

70

Dec 18

Dec 19

CASH

04

Invest in a richer life,
however you define it.

This document has been prepared by Quintet Private Bank (Europe) S.A. The statements and views expressed in this document based upon information from sources believed to be reliable – are those of Quintet Private Bank (Europe) S.A. as of 20 June, 2020 and are subject to change. This information is defined as non-independent research because it has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, including any prohibition on dealing ahead of the dissemination of this information. This document is of a general nature and does not constitute legal, accounting, tax or investment advice. This document does not provide any individual investment advice and an investment decision must not be based merely on the information and data contained in the document. All investors should keep in mind that past performance is no indication of future performance, and that the value of investments may go up or down. Changes in exchange rates may also cause the value of underlying investments to go up or down.

Copyright © Quintet Private Bank (Europe) S.A. 2020. All rights reserved. Privacy Statement


Cumulative returns from cash net of inflation

Source: Bloomberg 

-13%

Past performance is not a reliable indicator of future returns

Inflation erodes the value of cash and over time this effect is 
compounded leading to significant losses

International interbank short term loan rate

Source: Federal Reserve of New York

Percentage points

The cost of borrowing is low by historical standards

Although cash may only be a small part of your portfolio, 
it may represent a much higher allocation across your total wealth

Lending is subject to qualifying criteria.

Rising market:
I’ll wait for a good entry point when markets fall back… 

Falling market:
I don’t want to invest now and face losses. I’ll wait for markets to turn…

Common mistakes when trying to time the market

Investors who try to time the market often end up doing nothing

ESG focussed money market funds (EUR bn)

Money market funds incorporating ESG factors are attracting large inflows

SAVINGS

5%

10%

PORTFOLIO

WEALTH

CASH

There’s more to cash than you think


CASH

5 POINT SUMMARY OF THIS ARTICLE


1

Holding cash is an active allocation choice


You can reflect sustainable values in your allocation to cash

The ‘dry powder’ argument doesn’t stack up


Consider borrowing if you need liquidity


Your wealth includes cash outside your portfolio

2

3

4

5

Cash appears to be the most straightforward store of wealth. Yet there’s more to think about – from the risk of missing out on higher potential returns from other asset classes to the opportunities available to reflect your personal values.


CASH

04

Holding cash is an active allocation choice


1

It’s easy to forget that inflation erodes the purchasing power of money. As the prices of goods and services rise, we can buy less of what we used to be able to afford. Although the rate of inflation is low today, we expect it to increase gradually over the long term as the economy recovers and demand from businesses and consumers picks up.

Interest rates are at record lows and even negative in some countries. They are unlikely to increase any time soon as central banks maintain monetary policies that can stimulate growth. Therefore, the returns from cash savings and short-term government bonds are likely to be negligible for the foreseeable future – and negative after taking inflation into account.

Holding cash is an active choice, and it’s important to consider the decision against the opportunity cost of investing. On rare occasions cash outperforms other asset classes, but only when the conditions are just right. Over the long term, cash is often an unattractive investment, which may drag down a portfolio’s returns as the economy and markets recover.

You can reflect sustainable values in your allocation to cash

2

As more of us realise our decisions make a difference, sustainable investing is becoming increasingly popular. It’s now possible to ensure that the cash allocations in your portfolio reflect your personal values by choosing money market funds that incorporate environmental, social and governance (ESG) factors into their investment decisions.

The core investment objectives of money market funds are to preserve capital and provide liquidity, so their investment approach naturally aligns with certain ESG principles. However, recently money funds have begun looking at these factors more proactively.

The money funds using ESG criteria invest in commercial paper and other private instruments. These funds specifically look at companies that meet or are adopting high standards in ESG terms.

There is significant demand for ESG money market funds, which is driving growth in this sector and has led to an increasing range of funds available for private investors and corporate treasurers.

Over the long term, cash tends to underperform most other asset classes, and investors could miss out on these potential returns if they  don’t invest. When considering entering a market a systematic and disciplined approach can be adopted, which involves investing cash gradually and being fully invested as much as is practically possible.

Some investors like to hold cash in their portfolios so that they have dry powder to put to work as soon as they spot an opportunity. Yet the reality is that waiting for an attractive entry point often leads to inertia. We end up doing nothing because we’re worried about making the wrong decision. During periods when markets are rising, it may be tempting to wait for a good entry point by keeping your cash rather than investing. But when markets are falling, many investors feel uncomfortable investing in case they suffer immediate losses. This pattern of behaviour can mean that our money remains uninvested.

The ‘dry powder’ argument doesn’t stack up 

3

Consider borrowing if you need liquidity

4

Cash and cash-like investments (such as short-term government bonds and commercial paper) can offer a source of comfort during periods of uncertainty in case you need money quickly. However, with interest rates at record lows, now might be a good time to take advantage of a loan if you need to free up some liquidity.


Rather than selling investments, you could consider borrowing against the value of your portfolio. You retain control of your core portfolio and gain immediate access to funding. 

Meanwhile, some of the economic conditions that are bad news for cash have the opposite effect on debts. They include inflation, which erodes the value of loans over time in the same way that price rises reduce the purchasing power of your cash.

Consider borrowing if you need liquidity

5

Many of us think about the various assets and investments that make up our wealth in different ways, and the same goes for any cash savings. It’s a common cognitive bias called mental accounting, and it can affect our financial behaviour in unhelpful ways. One side effect is that many people end up with a higher total allocation to cash than they think.

It’s important to consider all your cash holdings together with your investments, and not to segregate them into separate buckets. You’ll then have a more accurate picture of your overall asset allocation, which can help you make better investment decisions as you stay focused on your long-term financial goals.

Invest in a richer life,
however you define it.

This document has been prepared by Quintet Private Bank (Europe) S.A. The statements and views expressed in this document based upon information from sources believed to be reliable – are those of Quintet Private Bank (Europe) S.A. as of 20 June, 2020 and are subject to change. This information is defined as non-independent research because it has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, including any prohibition on dealing ahead of the dissemination of this information. This document is of a general nature and does not constitute legal, accounting, tax or investment advice. This document does not provide any individual investment advice and an investment decision must not be based merely on the information and data contained in the document. All investors should keep in mind that past performance is no indication of future performance, and that the value of investments may go up or down. Changes in exchange rates may also cause the value of underlying investments to go up or down.

Copyright © Quintet Private Bank (Europe) S.A. 2020. All rights reserved. Privacy Statement


Source: Bloomberg 

Past performance is not a reliable indicator of future returns

Inflation erodes the value of cash and over time this effect is compounded leading to significant losses

Money market funds incorporating ESG factors are attracting large inflows

Investors who try to time the market often end up doing nothing

Source: Federal Reserve of New York

Lending is subject to qualifying criteria.

The cost of borrowing is low by historical standards

Although cash may only be a small part of your portfolio, it may represent a much higher allocation across your total wealth

Contact us

For further information, please visit: www.quintet.com

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Seeing the world differently

Counterpoint July 2020 is our first digital monthly edition of Counterpoint. Each month we will add a new edition to this library to keep you up to date on our macroeconomic and market views.
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Seeing the world differently

Counterpoint July 2020 is our first digital monthly edition of Counterpoint. Each month we will add a new edition to this library to keep you up to date on our macroeconomic and market views.

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