By Rainer Michael Preiss | Global Markets Commentary
An old saying on Wall Street, and indeed around the world, is that “cash is king.” Yet for sophisticated investors and private clients, the more important questions are: cash in which currency, held with which bank, earning what interest rate, and perhaps most importantly, what percentage of a globally diversified investment portfolio should be held in cash?
These questions may appear straightforward, but the answers are more complicated than many investors appreciate. Cash is frequently treated as an afterthought in portfolio construction, with most attention directed towards equities, bonds, real estate, commodities and alternative investments. Yet the decision to hold cash, and how much of it, can significantly influence long-term investment outcomes.
Cash provides liquidity, offers stability during periods of financial market volatility and allows investors to take advantage of opportunities when asset prices decline. However, holding too much cash can be costly. Inflation erodes purchasing power, while investors who remain excessively defensive may miss opportunities to participate in long-term capital market growth.
The challenge is therefore to find an appropriate balance between liquidity, financial security and the productive investment of capital.
There is no universally correct cash allocation. A younger investor with a long investment horizon, stable income and substantial financial reserves outside the portfolio may have little reason to maintain a large cash position. By contrast, someone approaching retirement, relying on portfolio withdrawals or preparing for a substantial property purchase may require considerably more liquidity.
As a general illustration, a long-term growth portfolio might maintain between 0% and 5% in cash, while a balanced global portfolio could hold approximately 5% to 10%. More conservative portfolios focused on wealth preservation may maintain allocations of 10% to 20%, while investors adopting a particularly defensive position might temporarily increase cash holdings to 15% or even 25%.
These percentages are not fixed recommendations. They provide reference points for a broader discussion about liquidity within an investor's overall financial position. A family with substantial holdings in private businesses, real estate or private equity may require considerably more readily available capital than an investor whose wealth is predominantly invested in publicly traded securities.
One important distinction is between cash held for a clearly defined purpose and cash accumulated because an investor is uncertain about financial markets. The former reflects disciplined financial planning. The latter can easily become an expensive form of indecision.
Cash allows investors to meet spending requirements, tax liabilities and other obligations without being forced to sell investments during unfavorable market conditions. It can also reduce portfolio volatility and help investors remain psychologically comfortable during market corrections. Perhaps most importantly, cash creates flexibility to acquire attractive assets when valuations become more compelling.
However, this flexibility comes at a price.
Consider a hypothetical investment portfolio of US$1 million over 15 years. If the entire amount were held in cash earning a constant annual return of 3%, its value would increase to approximately US$1.56 million. If fully invested in assets generating a hypothetical annual return of 6%, it would grow to approximately US$2.40 million. A portfolio maintaining 20% in cash earning 3% and 80% in investments earning 6%, with annual rebalancing, would finish at approximately US$2.22 million.
These simplified illustrations are not forecasts and exclude inflation, fees and taxation. Nevertheless, they demonstrate an important principle: liquidity has an opportunity cost.
Inflation introduces another complication. Investors often associate cash with safety because its nominal value generally remains stable. Yet nominal stability should not be confused with preservation of purchasing power. A deposit yielding 3% annually when inflation is running at 4% produces a negative real return of approximately 0.96%, even before taxation.
Interest rates also influence the attractiveness of cash. During periods of elevated policy rates, bank deposits, Treasury bills and money market instruments can offer competitive yields. However, when central banks reduce interest rates, the income available from cash instruments may decline quickly. Investors accustomed to attractive deposit rates can therefore face reinvestment risk.
For internationally diversified private clients, cash allocation is also inseparable from currency management.
An investor holding US dollars, euros, Swiss francs, Singapore dollars or emerging-market currencies is making decisions not only about liquidity but also about foreign exchange exposure. A German investor living in Asia, for example, may require Singapore dollars for everyday expenditure, euros for European commitments and US dollars for international investments.
Simply selecting the currency offering the highest deposit interest rate can be misleading. Higher nominal yields may compensate investors for additional inflation, credit or currency risks. A substantial currency depreciation can quickly overwhelm the additional interest income earned.
Another important distinction is between strategic and tactical cash allocations.
Strategic cash represents the liquidity an investor intends to maintain over the long term as part of a disciplined portfolio framework. Tactical cash represents a temporary adjustment in response to market valuations, economic conditions or anticipated opportunities.
A balanced portfolio might establish a strategic cash allocation of 7%, with flexibility to move between 5% and 12%. However, increasing cash to the upper end of that range should involve a clear investment rationale and an understanding of when the additional liquidity will be reinvested.
Without such discipline, tactical cash can gradually become a permanent expression of market pessimism. Investors may reduce exposure expecting a correction, only to discover that markets continue rising. Even when a correction eventually occurs, deciding when to reinvest can prove equally difficult.
This is why market timing remains challenging. Investors must make two correct decisions: when to reduce exposure and when to restore it.
The growing importance of artificial intelligence and concentration within global equity markets adds another dimension. Enthusiasm surrounding AI infrastructure, semiconductors and related technologies has encouraged some investors to maintain additional liquidity in anticipation of potential corrections.
There is nothing unreasonable about retaining flexibility when valuations appear demanding. However, financial markets can remain expensive for extended periods. Remaining substantially underinvested while waiting for the perfect entry point can be costly.
Private clients should also examine how their banks manage and remunerate cash balances. Cash held in custody accounts does not necessarily earn competitive interest rates. Deposit pricing, fiduciary placements, counterparty exposure, deposit protection and foreign exchange conversion costs can materially influence the return on liquidity.
For wealthy families, liquidity planning becomes especially important when substantial assets are tied up in real estate, private equity or closely held businesses. Significant wealth on paper does not necessarily translate into readily available cash.
Ultimately, cash should serve the investment strategy rather than dominate it. Too little liquidity can force investors to sell assets at unfavorable prices. Too much cash can undermine long-term wealth accumulation through inflation and missed investment opportunities.
In my view, cash deserves considerably more attention in discussions between private clients, private banks and investment advisers. I generally favor a clearly defined strategic allocation, supplemented where appropriate by a disciplined tactical range. For a globally diversified balanced portfolio, a cash allocation of approximately 5% to 10% can provide a useful starting point, although individual circumstances must always determine the final allocation.
Investors should remember that holding cash is itself an investment decision. It carries opportunity costs, inflation exposure and, where foreign currencies are involved, exchange-rate risk.
Financial markets are almost always uncertain. The objective should not be to hold cash simply because uncertainty exists, but to maintain sufficient liquidity to meet obligations, preserve flexibility and take advantage of opportunities without compromising long-term investment potential.
Liquidity is valuable, but liquidity without a clearly defined investment strategy can become an expensive luxury.
Disclaimer
This article is provided for general information and educational purposes only. It does not constitute personalized investment advice, an offer to buy or sell securities, or a recommendation to enter into any financial transaction. The asset allocation ranges and hypothetical returns discussed are illustrative and should not be interpreted as forecasts. All investments involve risk, including the potential loss of capital. Investors should consult qualified professional advisers and consider their individual financial circumstances, investment objectives, tax position and risk tolerance before making investment decisions.
Rainer Michael Preiss
Partner & Portfolio Strategist
DAS Family Office, Singapore
