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Market volatility in September and October after seven months of gains inevitably made some investors wonder if it was time to “go for cash” before the big correction. The S&P 500 had its first decline of 5% in over a year and volatility is not expected to decline when the profit season begins and companies face profit growth and margin pressure, with labor and investment prices rising and the global supply chain still chaotic. Investors are likely to have a quick trigger with any disappointments in the guidance.
“The foam has continued and the only thing is that time will tell how long it will take,” said JP Morgan Asset & Wealth Management DVD Mary Erdoes in a recent statement on CNBC. Delivers Alpha conference. “It’s just a matter of how patient investors are and with the time value of money being almost zero, people should be pretty patient with what they invest in.”
The story goes that investors struggle to be patient, and market turmoil inevitably leads some investors to make the decision to sell shares. For some, reducing exposure to equities can be cautious – if a person is close or in the retirement phase of their investment life where income becomes more important than the absolute stock estimate, they may be overweight in the US market today.
But for most investors with a longer time horizon — and even for retired investors — the decision to go for cash should not be binary between either being on the stock exchange or out. All research says that it tends to be a bad decision. Going for cash requires that you are right twice – when you come out and when you decide to come back. And it is the latter that often has major consequences for investors. Far too many people become tentative before coming back and lack long profits.
The history of market corrections, bear markets and recoveries shows that a do-nothing strategy tends to benefit investors over time more than a go-to-cash strategy, but according to top institutional investors is not the best way to act either. Research has consistently shown that time in the market is more important than perfect timing, but that does not mean that money should not move from one part of the market to another on a relative valuation basis. Investors should always be ready to go for cash so that they can take chances in the market rather than cut and run from it. There should always be a portion of a portfolio in holdings that can be turned into cash to take advantage of market downturns and pour more money into depressed securities.
Do not be a forced seller. Was “super cash efficient”.
“You never want to be a forced seller of risky assets at reduced prices because of the turmoil in the market that locks fixed capital write-downs,” says Ashbel Williams at Delivering Alpha. Williams, who recently retired as chief executive officer and chief investment officer of the $ 200 billion portfolio at the Florida State Board of Administration, explained that the decision to go for cash is indeed a decision to rebalance stocks while they are down.
“There must always be liquidity when stock markets go down,” Williams said. “The first way to protect capital is to follow investment policies and rebalance equities while being depressed.”
That message was repeated by several top executives at Delivering Alpha.
“We are super efficient and balance a lot,” said Elizabeth Burton, chief investment officer of the Hawaii State Employees’ Pension System. She described being “super efficient” as the most important strategy for the state’s portfolio end result and said that there is never a time when she as an investor can afford not to be in equities.
Thinking about cash properly becomes more important during periods when investor tolerance for risks and patience is tested by market volatility, and in particular the US stock market has published what investors see as “atypical” returns. Many of the best investors who spoke at Delivering Alpha expect lower returns from US equities in the future and is already hunting for depressed opportunities in stocks around the world, including in Europe and China.
“This is not a normal time period,” Erdoes said.
Investors take different approaches to a near- to medium-term stock outlook that gives them a break. Secure inflation risk with fixed assets including real estate, alternative assets including cryptocurrency and a focus on hyper-growing companies rather than broader market profits, are among the ways in which investors make deposits among what they see as a US stock market going a little hot.
“The simple gains from the Covid bottom have really been made,” said Brad Gerstner, chairman and CEO of Altimeter Capital at Delivering Alpha. he sold some travel stock and has reduced his long-term net exposure to 50%, but he has bought some growth names that were knocked down after a Covid-sharp increase, e.g. Zoom video and Peloton.
Negative interest rates and portfolio liquidity
In a traditional equity and bond portfolio, where you have to store assets in a more liquid bucket so that they can be liquidated when an opportunity to balance itself is a greater challenge in a world of negative real interest rates that make bonds unattractive.
“Negative real interest rates are here to stay, 74% of global AGs have negative real interest rates, every single US treasury has a negative real interest rate and the time value for money is really nothing,” Erdoes said.
Liquid assets such as treasuries, which investors can buy and sell quickly and usually appreciate in value in troubled times, have historically been a good method of generating revenue to rebalance equities and participate in a rebound.
“That was exactly what we did in March 2020 and sold treasuries … and did it in 2009,” Williams said. “You always have to have something you can go cash with to rebalance.”
Williams said that his government investment allocation policy has historically had a treasury as high as the mid-20s in percent and it is now down to just under 20%, which is still enough to meet rebalancing needs. But the central government also uses substitutes for bonds in a negative real world.
“It often means you own things … airplanes, trains, timber, rights to music and television programs, theaters, anything that can create cash flows, not market-correlated,” Williams said.
“Collectibles, if you have an edge there, like a family office, they can be a great place to sit for a while,” Burton said.
But for most investors, if they do not have the edge of a multi-billion institutional investor with access to both private and alternative asset classes, the best thing they can do when markets are volatile: use cash to rebalance instead of sitting in cash for too long .