With the recent increase in the Repo rate and further projected rate increases to come, cash as an asset class should be revisited by those investors who have not already done so. Investing in the stock market and sitting on cash might seem like mutually exclusive options, however cash instruments play a key role in the successful diversification of portfolios, especially through times of volatility, like Global markets are experiencing.
Increased volatility:
Global markets have experienced significant volatility on account of numerous factors. The Ukrainian war, increased inflation as well as the Pandemic have all been contributing factors to the recent equity sell off. In times of market volatility and increased risk, cash instruments should be considered by investors as a diversification and risk mitigation tool. Adding a cash element to a portfolio allows an investor to decrease portfolio risk and secure an additional income stream in the form of regular interest payments. Different cash instruments can shelter portfolios in the case of large market moves and ensures an element of income is forever present in unfavourable equity environments.
In a bull market, cash performance will be significantly lower to that of the stock market, however adding a cash element to your long-term portfolio, especially with rising interest rates, ensures yield is achieved regardless of market performance, as well as having a liquid asset class should the pullback present buying opportunities:
Cash as an offensive asset:
Cash is typically viewed as a defensive asset class for the risk averse investor, however in times of increasing interest rates and decreasing equity prices, cash can be a powerful offensive tool in securing interest income, whilst offering the opportunity to capitalise on equity buying opportunities should the pullback result in good entry positions regarding value. As the saying goes, âcash is kingâ and including a cash element within a portfolio means securing an additional income stream as well as having a war chest should equity prices pull back into value opportunities.
For the patient investor, equity pull backs can result in opportunities to acquire assets at below true value prices. This will in turn increase returns over time. Cash allows you as an investor to capitalise when the moment is right and not have to first look to exit other long term asset positions to do so. There are different types of cash instruments one can utilise as an investor:
Types of cash instruments:
Conclusion:
With increasing interest rates and decreasing equity prices on account of increased market volatility, cash can be used by investors as an offensive asset class. The immediate benefits of cash within a portfolio include further portfolio diversification, higher interest income on account of a higher repo rate as well as a highly liquid asset class to pounce on immediate market opportunities. This is why investors should be considering a cash element within their portfolios.
