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Why Too Much Cash Is Hurting Your Portfolio This Year


An investor could find a host of reasons not to put capital at risk in the markets. However, the reality is that other asset classes are offering far superior returns this year.

As an active portfolio manager, I have always viewed cash as a strategic position from which to deploy capital to take advantage of new opportunities. It has always been a safe harbor where you can shelter your portfolio when the storm clouds converge or temporarily store profits when investments hit your upside targets. However, the biggest mistake you can make with cash is holding too much of it for too long. That is oftentimes a signal that you don't have a true game plan in place to achieve either growth or income with your capital.

The two biggest arguments for holding a cash position of greater than 50% of your portfolio are usually driven by fear or conviction. It's easy to rationalize that stocks are overvalued, rising interest rates will destroy bonds, and commodities are doomed to a multiyear deflationary cycle. If I watched the headline news every night, I could find a host of other reasons not to step outside my front door each day let alone put my hard-earned capital at risk in the markets. However, the reality is that any money that is placed in cash is earning a very minimal return when compared to other asset classes this year.

A quick look at the SPDR S&P 500 ETF (NYSEARCA:SPY) shows that this broad-based measure of large-cap stocks is less than 0.50% away from its all-time highs even after a modest correction in January. Clearly stocks are signaling that the trend of equity price appreciation we experienced last year is being carried forward to start 2014 as well. While that may change at some point in the future, I am always respectful of a rising market and upward sloping trend line.

In addition to the strength in stocks, both precious metals and fixed income have regained their mojo over the last six weeks. Treasury bonds, as measured by the iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT), have returned nearly 5% through Friday's closing price. This is one of the best starts to the year for Treasuries since the 2008 financial crisis and may be a sign that investors are looking to hedge their bets in stocks with deflationary assets. This type of diversification can help mitigate volatility if we see a deeper correction in equities later this year.

The decline in interest rates and boost to bond prices has also been a tailwind for interest rate-sensitive investments like utilities, REITs, and preferred stocks. Each of these sectors lagged the broader market last year but started 2014 as income value opportunities that offer excellent yields and attractive capital appreciation potential. One of my favorite ETF income opportunities for 2014 is the iShares US Preferred Stock ETF (NYSEARCA:PFF) which pays a yield of 6% and has been strengthening considerably this year.

The SPDR Gold Shares ETF (NYSEARCA:GLD) has also been on a mission to regain its long-term uptrend and just recently crossed back above its 200-day moving average. This is another sign of investors turning to a non-correlated asset class that was severely beaten down. GLD has gained 9.50% to begin the year through Friday's closing price and may attract additional capital as more investors take notice of the resurgence.

The bottom line is that we are continuing to see multiple asset classes that are providing a much higher return than a money market fund. Whether or not you believe that the results are sustainable will probably factor in to your decision on putting new money to work at these levels. In my opinion, we will likely see some additional volatility in stocks this year that will shift money to traditional safe havens like Treasuries and precious metals. However, with a diversified portfolio mix of conservative investments and a risk management game plan, you can capitalize on these new trends and generate positive returns.

Holding a slug of cash in your portfolio is not a bad thing as long as you are disciplined enough to put it to work when opportunities arise. It should be looked at as a short-term hiding spot and not a long-term investment theme. If you don't have the comfort level or confidence to do that, then you should consider hiring an advisor who you align philosophically with in order to provide that expertise for you.

Read more from David Fabian, Managing Partner at FMD Capital Management:

3 Reasons Bears Never Prosper

Why I'm Not Adding to the PIMCO Dynamic Income Fund

How Healthcare ETFs Can Strengthen Your Portfolio

Twitter: @fabiancapital
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