As tax season winds down on April 17th, you still have time to contribute to your retirement accounts. Take this opportunity to review your overall asset allocation. The markets have been in a decidedly upward trend since the beginning of 2012. Still many retail investors continue to move their money into bonds and cash instruments such as money markets, according to fund flow data.
In today's uncertain markets, many investors have switched into what they view as a riskless trade—cash. Cash investments enjoy low volatility, predictable returns and a reputation for preserving capital. But even with low reported rates of inflation, returns on cash have not kept pace with the cost of living. After factoring in inflation, the value of cash diminishes in real terms over time.1 While holding some cash is wise, holding too much for too long is not a smart strategy.
In terms of investment risk, cash is probably the most conservative option. But safety and comfort come at a price—the probability you will not meet your long-term investment goals. Whether you are trying to preserve income or grow your wealth, holding large amounts of cash over the long term will hurt your ability to meet these goals—and increase the risk of outliving your assets. Especially when you factor in today’s historically low yields. While today’s market conditions understandably produce anxiety, investors with large amounts of cash should take a step back, assess their goals, and work with a financial professional to make their money work harder (and smarter) for them.
Cash averages a negative return after taxes and inflation
If you have decided to put your cash to work into bonds, you may want to think again. While we are in a low interest rate environment and bonds are getting a higher rate of return than your money market accounts, make sure that you are aware of the risks involved. As interest rates inevitably rise, bond prices will decline, which means your bonds could be worth less than what they were when you purchased them. It may be a good time to re-evaluate your allocation and consider adding some non-correlated, alternative investments to your portfolio.
Alternative investments such as managed futures are a great way to offset portfolio risks and protect against the downside.
Please don’t hesitate to contact me at 212-785-4377 x 224 to discuss how alternative investments can play a significant role in protecting and enhancing your portfolio allocation.
John J. Fiorito
Securities offered through Dinosaur Securities, LLC Member FINRA, SIPC, NFA.
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