Why cash still commands respect
The importance of cash within a portfolio cannot be understated. Cash may no longer be king but it still commands a place within a well diversified portfolio. It provides a buffer against portfolio volatility, flexibility to cover unexpected expenditures and capacity to exploit opportunities across other asset classes. Maintaining an adequate exposure to cash assets may provide self managed super fund (SMSF) trustees with the ability to meet mandatory pension requirements on an ongoing basis without the need for a hasty sell down of assets.
The cash factor and fragility
With the benefit of hindsight, we know that the requirement to pay minimum pensions during the GFC impacted many self-funded retirees as they were forced to redeem quality assets in a rapidly declining equities market to facilitate these withdrawals. While the government temporarily reduced minimum pensions to ease the strain, the current pessimistic outlook for Australia’s economy poses the question whether such government intervention would be repeated in the event of another financial crisis. In this context maintaining sufficient cash balances provides capital protection and allows investors to avoid being forced to sell assets in depressed markets.
The expectation that equities will remain buoyant due to the perception they offer the most attractive return in the low interest rate environment can carry significant risk. The continuing uncertainty of the Australian dollar may deter foreign investors from maintaining their invested capital in our domestic market and a stalling economy combined with low consumer and business confidence could result in depressed earnings growth or falling profitability for Australian companies, placing pressure on stock prices.
Cash and your SMSF
The importance for cash as an asset within any SMSF portfolio remains paramount and arguably becomes more important with age. While being ‘fully invested’ may feel comforting, it could well prevent you from responding to opportunities. Having a cash buffer may allow you to purchase depressed assets following a market correction, which can prove very beneficial over the long term.
A primary objective in managing your SMSF is to maintain a diversified multi-asset portfolio with an appropriate risk tolerance and liquidity. This can be important in an environment of volatility and uncertainty. If you believe you may need cash from your SMSF within the next two years, it may be wise to maintain these funds as cash or cash equivalents.
This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Any forward looking statements are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct.
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