In practice, investing is often more about emotions than logic. (ddp)


The most common reason investors give for holding a large proportion of their portfolio in cash is as an “emergency fund”. But other reasons given suggest potential "behavioral biases" such as loss aversion and decision paralysis that can help explain why self-directed investors tend to underperform benchmark market indices over the long term.


  • Waiting for the right investment opportunity, or to buy on a market downturn. First, "dry powder" doesn't come for free. Cash rates are at or near record lows, and are well below inflation in most countries, which means that an investor loses purchasing power while they hold cash. Second, since 1945, investors in a simple balanced portfolio (60%US large-cap equity, 40% US government bonds), would only have seen a subsequent greater-than-20% portfolio loss in about 5% of cases. Waiting can often result in the worst of both worlds: a high opportunity cost, and being forced to eventually buy at even higher levels.

  • Holding cash as protection against a market downturn. But cash is an inefficient way of managing portfolio downside risk over the long term. Cash reduces the portfolio's return during bull markets, while also providing very little "crisis alpha" during market drawdowns. Cash holds its value very well over the short term regardless of market environment, but doesn't appreciate when markets fall.

  • Cash helps me sleep at night. Thirty-five percent of investors surveyed in our Investor Sentiment survey said they hold cash because it "helps me sleep at night." For investors with high savings relative to their expenses, owning high levels of cash is understandable from a pure risk management perspective. Investors with 33 years' worth of savings have nearly no chance of depleting their wealth over a 20-year time horizon regardless of whether they invest in cash, a diversified multi-asset portfolio, or diversified global equities. But the potential gains to investing in riskier assets can be significant. We estimate an investor in an equities portfolio would be 86% wealthier than a fixed income investor by the end of a 20-year period.

There are a number of strategies to help investors overcome these potential biases including phased market entry, holding a diversified portfolio, and incorporating option and structured products strategies. It’s also important to have a plan. We recommend using a framework which we call Liquidity. Longevity. Legacy.* to develop an investment strategy optimized for your goals and objectives. Read more in our new updated report “Plan. Protect. Grow.”


Main contributors - Mark Haefele, Christopher Swann, Jon Gordon, Vincent Heaney


Content is a product of the Chief Investment Office (CIO).


Original report - Retreating to cash is not the answer, 3 September 2019.


*Timeframes may vary. Strategies are subject to individual client goals, objectives, and suitability. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved.