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Maintaining a high cash balance is not rational when you do the math, and most investors move into cash holdings at the wrong time due to emotional reactions. (istockphoto)
Maintaining a high cash balance is not rational when you do the math, and most investors move into cash holdings at the wrong time due to emotional reactions. (istockphoto)

ASSET ALLOCATION

It’s time for Canadians to shift excess cash into long-term investment plans Add to ...

Investors who are hoarding large amounts of cash need to start dipping their toes back into the market.

Since the 2008 global financial crisis, excess cash reserves held by Canadians have risen notably – totalling $75-billion – and represent almost 10 per cent of the total value of overall personal liquid assets in Canada, according to a CIBC World Markets report released Monday.

Canadian investors hoarding $75B in cash (BNN Video)

But financial experts are urging clients to break away from emotional decisions and start to shift their piles of cash from under the mattress back into long-term investment plans.

“Sitting on cash now gives the illusion of security,” says Darren Coleman, an investment adviser and portfolio manager with Raymond James Ltd. “It is peace of mind today, for tremendous insecurity in the future. The market won’t affect your capital – but your debit card will. You’ll simply spend all your money as it isn’t generating.”

Mr. Coleman suggests investors first need to “run the math” and determine a long-term asset allocation plan.

“Let’s get past what you need for today, and instead calculate what is the long-term rate of return your portfolio needs to accomplish the outcome you are looking for,” Mr. Coleman says.

Take the emotion out of it

Maintaining a high cash balance is not rational when you do the math, and most investors move into cash holdings at the wrong time due to emotional reactions. Waiting until you feel more comfortable with the markets will make you miss the rally, says Wade Kozak, investment adviser and portfolio manager with CIBC Wood Gundy.

“Keeping a portfolio of cash isn’t going to give you the rate of return you need for any investment goal,” Mr. Kozak says.

“As cash levels build up, periodically step in and look at your investment portfolio to assess your allocation. Then apply your cash to get back to your original allocation levels and put it out of your head until your next scheduled review.”

Assess risk tolerance

If someone has reacted strongly to market volatility in the past – causing them to shift into large cash holdings – their risk tolerance should be slotted lower than average.

“Putting investors into strategies that have a manageable amount of risk will avoid letting market fear get the best of them,” Mr. Coleman says.

Start slowly

If an investment plan recommends a 30-per-cent exposure to the stock market, don’t step in all at once. Start with 10-per-cent exposure and increase the percentage slowly over several months or quarters.

“Since it is impossible to time the markets and correctly pick their peak and trough, we would advise dollar-cost-averaging to invest some of the cash over a pre-determined number of weeks or months,” says Mitchell Prothman, a portfolio manager with Alitis Investment Counsel Inc.

Look for market opportunities

Canadians with mid-to-longer-term time horizons should look at deploying a segment of cash with the correction.

Mr. Prothman uses a multi-asset class approach with a large allocation to alternative investments in order to increase diversification and generate more stable returns.

“For fixed income, we have been investing in companies that provide real estate financing. These companies lend up to 74 per cent of the value of a property and get paid 7 to 10 per cent in most cases to do so,” he says.

“Some of these companies are now trading at or near 20-per-cent discounts to their book value with no material defaults, so not only are you getting an attractive yield, you are also receiving some capital appreciation potential.”

For Canadian equity investors, consider energy, Mr. Prothman says.

“We don’t know where the price of oil will be next week or a couple of months from now, but we believe $30 (U.S.) oil is not sustainable,” he says. “We believe this presents an enormous opportunity for investors that have a longer-term time horizon and are prepared for short-term volatility.”

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