The role of cash
For many investors, cash appears to be the ’obvious’ solution for safety and capital preservation. The role of cash should be for liquidity and not safety. Holding too much cash is detrimental to an investor's long term goals. UBS Wealth Management CIO recommends a relatively limited allocation to cash (i.e. 5%) in its Strategic Asset Allocation (SAA). Unfortunately, most investors tend to hold an excessive amount of cash in their portfolio (the average cash holding is about 30%).
In the long run, cash will underperform other financial assets that offer a risk premium. The more cash an investor holds on to, the greater the risk he must assume on the invested portion of his portfolio (while having fewer investment options). An excessive allocation to cash also prevents effective diversification and is likely to put long-term financial objectives in jeopardy.
In summary, cash is not king and investors should identify suitable cash alternatives based on their individual preferences for risk, time horizon and expected return. Visit ubs.com/cashblowingaway to learn more, or please contact your client advisor today to optimize your portfolio allocation.