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The safe route of cash may be risky for an umber of reasons

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We have all heard the saying, "Cash is king." In some cases, it may even be true. But when it's sitting in your investment portfolio, cash may be doing you more harm than good.

According to the latest BlackRock Global Investor Pulse survey, Canadians have a national love affair with cash. Participants in the annual survey – 2,000 Canadians between the ages of 25-74 – reported that 60 per cent of their financial holdings are in cash or cash products. And even though respondents said they felt this proportion was double what they thought they should have, they also thought that "cash feels safe."

In turbulent markets (like the post-Greece crisis, post-China slowdown markets of today), investors may be tempted to load up their investment holdings with plenty of cash, thinking it is a safe way to ride out a rough time.

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That "safe" move may be risky for a number of reasons, says Chip Castille, managing director and chief retirement strategist at BlackRock Inc.

"Your retirement portfolio is shockingly volatile, it is extremely sensitive to interest rates," he says.

By Mr. Castille's calculations, the cost of retirement has been rising for investors in the 55-year-old age bracket because fixed income returns are not what they once were, owing to low interest rates. Investors with exposure to equity markets have enjoyed positive returns since the start of 2014. If investors had been all-cash during that period, they would have fallen behind in comparison.

That's not the end of the "cash is bad" argument though. In today's ultra-low-interest rate environment, your cash portfolio is not treading water, it's slowly drowning. Inflation is running ahead of any meagre gains your cash investments are producing. That's despite the fact that they may be tax-protected gains in an RRSP or worse, in a non-registered and taxable account.

"Savings accounts might give you 0.8 per cent interest, but that doesn't keep up with inflation that falls between 1 to 2 per cent in recent years," notes Tom Drake, an Edmonton-based financial analyst who also authors the Canadian Finance Blog. "A GIC [Guaranteed Investment Certificate] may give you a higher return, but after adjusting for inflation, the real return is almost zero."

Mr. Drake notes that theoretically there is a right time to be holding all cash in your portfolio, like say just before the 2008 financial crisis and subsequent crash of world markets.

But you'd need a crystal ball for that.

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"I don't believe in anyone's ability to time the market," says Mr. Drake. "By the time a market takes a downturn, it's too late to put your money in cash. You'd still be better off staying in the market and knowing that over the long haul, you'll be better off for it."

Mr. Drake says there are good reasons to keep a stash of cash, which after all is the most liquid of investments. "You might want to keep a portion in your portfolio for buying opportunities, and you should certainly keep your emergency fund available in cash."

That's an opinion shared by BlackRock's Mr. Castille, who suggests that a one-year source of required capital could be held in cash or a highly liquid, short-term bond fund.

There are cash alternatives, "but nothing really gives you the combination of both liquidity and security around asset values that cash gives you," says Mr. Castille. Buying an insurance product can give you the security of income that cash gives you, but investors sacrifice liquidity in that trade.

For investors concerned about risk, financial blogger Tom Drake suggests a balanced portfolio of low-cost index funds. "This portfolio could include some cash, but the inclusion of stocks and ETFs [exchange-traded funds] will actually help to reduce the risk over too much cash in your portfolio.


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This content was produced by The Globe and Mail's advertising department, in consultation with BlackRock Asset Management Canada Limited. The Globe's editorial department was not involved in its creation.
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