“25% of my portfolio is in cash,” is what I heard a portfolio manager say on TV during the February market correction. If only I had a dollar each time someone made this vacuous statement—I certainly wouldn’t keep it in cash! I don’t know why some portfolio managers think this is a viable marketing tactic, because I can’t imagine that anyone thinks that sitting on cash is a worthwhile investment approach. Cash is not an investment. It is a depleting asset that loses its value daily to inflation.

As you can see from the chart below, the U.S. dollar has lost close to 95% of its value over the last 100 years.

Purchasing Power of US Cash

In saying that you are 25% in cash, are you implying that you have knowledge of when the market will go down and even when it will subsequently recover? Please, don’t even go there!

Did that portfolio manager raise the cash before the correction happened? Probably not.

Or was the portfolio manager sitting in 25% cash for five years, thus missing one of the greatest bull markets in history? Most likely.

Do business channels ever bring these guys back after the correction is over to find out if they put the cash to work? Of course not, because it is impossible to time the market successfully. 

We view cash as a security blanket. When the market is going down, sitting on cash may make you feel better in the short term. And of course, no one should ever invest cash needed in the short-term in volatile, long term assets like stocks. I understand that the day-to-day volatility of the stock market isn’t for everyone and for those people, a higher cash balance may be necessary. With that said, even if one invests cash at money market rates of 1%, the real return will likely be negative in one year’s time thanks to inflation (which ran at 1.6% in Canada for 2017) and possibly taxes on the income earned.

Our negative feelings about holding cash certainly don’t mean that we ignore risk in portfolios. Markets are inherently volatile, and we take a number of measures to ensure that our clients don’t exceed their risk tolerances. These risk reduction strategies include allocation to less volatile assets, diversification across sectors, countries and size of companies, and concentration on companies with steady and growing dividends.

Our mission statement at Baskin Wealth Management states that we endeavor to protect our clients’ capital and build their wealth over time. With cash, we can neither protect capital nor build wealth over time. In our opinion, clients with time horizons longer than five years should keep the majority of their wealth invested in assets that have the ability to outperform inflation, fees and taxes. And so, for the majority of our clients, we have always remained close to fully invested.


Barry Schwartz

March 22, 2018