CASH
WEALTH
PORTFOLIO
10%
5%
SAVINGS
You can reflect sustainable values in your allocation to cash
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.
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.
Your wealth includes cash outside your portfolio
Consider borrowing if you need liquidity
The ‘dry powder’ argument doesn’t stack up
Holding cash is an active allocation choice
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.
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5 POINT SUMMARY OF THIS ARTICLE
CASH
There’s more to cash than you think
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.
Money market funds incorporating ESG factors are attracting large inflows
ESG focussed money market funds (EUR bn)
Investors who try to time the market often end up doing nothing
Common mistakes when trying to time the market
Falling market:
I don’t want to invest now and face losses. I’ll wait for markets to turn…
Rising market:
I’ll wait for a good entry point when markets fall back…
Lending is subject to qualifying criteria.
Although cash may only be a small part of your portfolio,
it may represent a much higher allocation across your total wealth
The cost of borrowing is low by historical standards
Percentage points
Source: Federal Reserve of New York
International interbank short term loan rate
Inflation erodes the value of cash and over time this effect is
compounded leading to significant losses
Past performance is not a reliable indicator of future returns
Source: Bloomberg
Cumulative returns from cash net of inflation
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
Invest in a richer life,
however you define it.
Go to currencies
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.
04
CASH
Dec 19
Dec 18
70
54
Back to viewfinder
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.
Source: Fitch
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.
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.
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.
Back to viewfinder
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.
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.
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.
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.
04
CASH
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.
5
4
3
2
Your wealth includes cash outside your portfolio
Consider borrowing if you need liquidity
The ‘dry powder’ argument doesn’t stack up
You can reflect sustainable values in your allocation to cash
Holding cash is an active allocation choice
1
5 POINT SUMMARY OF THIS ARTICLE
CASH
There’s more to cash than you think
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.
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
Invest in a richer life,
however you define it.
Although cash may only be a small part of your portfolio, it may represent a much higher allocation across your total wealth
The cost of borrowing is low by historical standards
Lending is subject to qualifying criteria.
Source: Federal Reserve of New York
Investors who try to time the market often end up doing nothing
Money market funds incorporating ESG factors are attracting large inflows
Inflation erodes the value of cash and over time this effect is compounded leading to significant losses
Past performance is not a reliable indicator of future returns
Source: Bloomberg
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.
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.