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Cash rules everything around me, as the Wu-Tang Clan famously observed in their mid-90s hip-hop classic. This sentiment holds true in the financial markets today.
In early 2020, Ray Dalio, founder of Bridgewater Associates, dismissed cash as a poor investment option. He advised investors to diversify their assets for higher returns. Little did he know that the Covid pandemic would soon wreak havoc globally. However, his advice was prudent at the time, as parking money in low-yielding financial instruments seemed unwise before lockdowns were implemented.
Dalio only changed his stance in late 2020 when short-term interest rates reached a point of equilibrium. But now, cash is gaining renewed popularity among influential investors.
Simona Paravani-Mellinghoff, Chief Investment Officer of solutions at BlackRock, declared that “the king is back.” She described cash as an attractive asset class that should not be overlooked. The times have certainly changed from when cash was considered trash.
Several factors contribute to this shift. Firstly, short-term debt is producing significant yields due to the rapid increase in interest rates. Three-month US Treasury bills, which serve as a benchmark for cash investments, now yield just over 5%, comparable to riskier assets like high-grade corporate debt spanning several years.
This means that equities must now compete with corporate and government bonds for a place in investment portfolios. However, bonds also face tough competition from cash. For investors who endured losses in bonds last year, allocating a significant portion to cash is psychologically comforting.
Another factor that bolsters the appeal of cash is its versatility as a safe haven during times of uncertainty. With even professional money managers uncertain about market directions and the possibility of a recession, having cash reserves provides a cushion against potential losses.
Moreover, cash reserves offer the opportunity to act swiftly and seize high-potential investment opportunities. Being prepared and nimble is crucial in today’s perplexing and challenging market environment.
Although this argument is not fully embraced by all fund managers, there are influential voices supporting it. Pimco’s chief investment officer, Dan Ivascyn, warns that while he expects a soft landing for the US economy, the underpriced risk of a more severe downturn should not be ignored. Troubles in riskier pockets of the debt markets are not unimaginable.
Given these reasons, managing liquidity and holding onto cash should be a top priority. Keep some cash on hand to prepare for potential shocks and to seize promising opportunities in the coming years.
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