"25% cash! Are you mad? Exactly what are you expecting to happen Bengt?"
That was the response from an old colleague upon reading that my cash allocation is higher than it's ever been. And it's true normally I would never allocate so much to cash.
But these are not normal times. And since I moved into cash during the summer, it's proved a good move. Not only has it steadied a volatile ship, but it's going to provide some readies for opportunities down the line. And that's despite the recent ramp up in inflation to the 5% level.
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In fact I've got five good reasons to hold a decent slug of cash in your portfolio.
And I'm not talking about any of those money market funds', or cash ETFs. I'm talking about cold hard cash. We'll take a look at some different ways of holding your cash towards the end.
Five advantages to cash
I know that many readers will be aghast at the idea of holding an asset whose value is eroding as inflation bites. But I wouldn't get too carried away with that inflation idea I know it's out there; but there's precious little we can do about that for the moment. And I'd say the advantages are worth it...
Liquidity Like a loyal dog, cash is always there. That's why I'm not talking about money market funds and various bonds you may pick up from the bank (we'll include these when we look at bond allocation next week).
When, one day the market offers you the opportunity of a lifetime' you need funds that are ready to go. That's why you shouldn't tie the cash up. Banks need your liquidity too they have to keep a certain amount at hand for regulatory issues. That's why they try to tie you into locking up your capital in one, two, three or five year bonds. But we want our cash at hand without having to pay a big penalty if we need it.
Fixed Value Okay, so cash won't get you an inflation linked return right now. But you can't argue that cash doesn't give you wealth preservation in nominal terms. So what if inflation is high today. If you'd held cash in the FTSE over the last few months, then your so-called inflation protection would have cost you ten, or 15%. No matter what happens in the short-term market swings, cash will give you your pounds back one for one.
Not even the highest rated corporate or government bond can promise you that!
Simplicity It's very easy to find a home for your cash. This is not like investing in shares and bonds there stock selection is paramount. One wrong move and your cash can disappear in second.
Cash, on the other hand is easy just flick through the best buy' tables in the weekend press and you're there. Providing you follow the rules, you don't have to do too much homework with cash.
Just remember to follow the rules on security...
Security - And the rules are make sure you've got a government guarantee and that you stay within the limits (£85k for any one person with any one institution). To find out more, visit the Financial Services Compensation Scheme's website here.
When you're dealing with authorised institutions (which you always should be!) then your cash is guaranteed. And in the UK institutions are backed by a central bank that is ready, willing and able to print money to make good on those promises.
During the 2008 crunch even deposits in dodgy Icelandic, or Irish banks were made whole. The only people I know that lost money were those that had paid advisers to invest it there for them. How's that for service! Pay an adviser to invest your cash for you and lose your guarantee!
It's cheap - Here at The Right Side we just hate the fees and charges foisted on us by financial institutions. It erodes the value of your wealth at every turn. At least with cash there's no charge for getting in and out. It may sound silly to state this obvious fact, but in a low return environment, taking out fees really helps.
I mean, you're only getting just over 2% on the ten-year gilt these days. Now, let's say your fund manager charges 1.5% a year in fees. That means many tax payers are actually losing money on this proposition.
Why not just stay in cash!
Allocating your cash holdings
As we just saw, one reason cash is safe is because of the UK's willingness to print money to make sure it's still there tomorrow. But ultimately there's the risk of inflation especially if the Bank of England goes bananas.
That's why you should consider holding a strong currency' too. For me that's the euro and the Norwegian kroner. These are personal preferences. And in the case of the euro it's because I have other dealings on the continent.
If you have, or plan to have expenditure in other currencies (maybe you want to retire abroad), then it's a very good idea to hold some of that particular currency. Other places for safety include the Canadian dollar, Singapore dollar, Hong Kong dollar and Swiss franc (despite its euro-peg).
How you allocate your cash comes down to personal circumstances. I can only give you ideas I'm afraid.
That said, I'm happy to give you my personal weightings, but please bear in mind that this may not be best for you...
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Norwegian Kr
25%
Stlg SIPP/ISA
25%
Stlg Trading a/c
15%
Stlg Deposit a/c
20%
The interest I get varies from 0% (on my SIPP, ISA and trading accounts) to 3% for money on deposit. Not great but good enough for me.
Maybe I'm just a cash junkie!
To find out more about why I like the Norwegian kroner, click here. And if you're a MoneyWeek subscriber find out here what other currencies could provide diversification and safety.
Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.
Managing Editor: Frank Hemsley. The Right Side is issued by MoneyWeek Ltd.
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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.
He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.
Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.
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