Cash Is Looking Better As Investment

INVESTING
OCTOBER 8, 2008, 4:18 P.M. ET

Cash Is Looking Better As Investment
As the market pushes investors beyond their comfort zones, cash and cash-equivalent investments -- traditionally stodgy options for advisors -- are gaining appeal.

By SUZANNE BARLYN

Cash and cash-equivalent investments - traditionally stodgy options for advisors - are gaining appeal as extreme market volatility pushes many clients beyond their comfort zones.
Advisors typically suggest that clients limit cash exposure to between 5% and 10% of their portfolios, or maintain a reserve that is equivalent to between 18 and 24 months of living expenses, in the event of a bear market. But some advisors are increasing their clients' cash holdings and exposure to other "cashlike" short-term investments, particularly to U.S. Treasurys, a safe haven in a brutal market.
"Cash is looking better for a few different reasons," says Donald B. Cummings Jr., an investment advisor with Blue Haven Capital in Geneva, Ill. Cummings says he was concerned that some municipal money-market funds would potentially "break the buck" - or fall below $1 per share. He preemptively moved client funds into plain-vanilla U.S. Treasury money-market funds. Cummings recognizes that Treasury yields are low. For example, the current seven-day yield for the Dreyfus 100% U.S. Treasury Money Market Fund (DUSXX) is 0.51%. However, the strategy is more tolerable for the short term, he says.
"People expect volatility, but no one wants to lose three and four percent on their money-market funds," says Cummings. He's not entirely sold on the Treasury Department's temporary guarantee program for money-market funds, he says, which protects certain shareholders of money-market mutual funds from losses if their funds are unable to maintain a $1 net asset value. The program offers protection for money-market holdings valued as of Sept. 19. Cummings says he's concerned about jeopardizing funds deposited after that time. "We're telling everyone to hold tight for a few months and see how this plays out," he says.
Advisors are also being judicious about investing new cash from clients since the bear market onset in October 2007. Cathy Curtis, a financial planner based on Oakland, Calif., says she's been particularly cautious with several new clients she took on last October, when the market started its decline, whose accounts average about $500,000. Curtis says she invested about 50% of their money at the time and left the rest in cash, including the Schwab Value Advantage Money Fund (SWBXX). "I have been investing it slowly - even over the last month," she says - about $2,500 at a time.
Cummings is stretching cash that he'd normally invest within about a month across a four- to five-month span. He stashes funds that he plans to invest at a later time in pre-refunded municipal bonds - a high-quality municipal bond in which the income and principal is typically insured by an irrevocable trust of U.S. securities. Cummings says that tax-free yields are between 1.5% to 2.5% - significantly better than U.S. Treasurys. A three-month T-bill, for example, currently yields 0.75%. "There are places to hide on the short end of the curve that make a lot of financial sense," he says.
Some advisors are also considering their clients' sense of well-being. "It's important that people feel safe and that they're going to have some liquidity," says Pran Tiku, a wealth manager for Peak Financial Management Inc. in Waltham, Mass. He's raising cash by selling off lower-quality, higher-yielding bonds, which are typically viewed unfavorably by bond-rating agencies. "If the credit crunch is as ominous as it seems and does not have a resolution, then cash becomes a very important investment to hold," he says.
Tiku has been investing the cash in short-term bonds, such as short-term Treasurys and government instruments, as well as money-market funds. A 5% minimum of clients' balanced portfolios is typically held in cash and cashlike investments. But Tiku has increased the allocation to about 30%. He's decreased bond allocations to 7% from about 30%.
For Doug DeGroote, managing director of United Wealth Management in Westlake Village, Calif., increasing his cash allocation serves another purpose. "We're sitting in a more liquid stance and looking for [buying] opportunities. It's being prepared for a chance to move money back into the market," he says.
DeGroote says he converted low-yielding short-term bonds to cash in preparation to snag good deals. DeGroote's firm typically allocates between 5% and 10% of client portfolios in cash, However, the figure is presently closer to 20%, he says.
Not all advisors are completely sold, however. Mark Colgan, president of Colgan Capital in Pittsford, N.Y., says he modifies his plan only after a client calls on three occasions and expresses extreme anxiety - indicating a client's lack of risk tolerance. If the client is a retiree, Colgan will then build a small cash position of between 12 and 24 months' worth of withdrawals to ride out the bear market. But he urges younger clients to stay the course. "For me, it is more about aligning the client with the proper portfolio - not reacting to the markets," he says.
Laura Mattia, an advisor with Baron Financial Group in Fair Lawn, N.J., says the firm adopts an "all-weather strategy" with clients early on and doesn't waver. Mattia and her colleagues typically limit cash exposure to 18 months of a client's personal expenses. "All of these assets will come back. They are going to rebound," she says. "The day when the stock market goes up 800 points is when people are going to be sitting there in cash saying I should have, would have could have."
Write to Suzanne Barlyn at suzanne.barlyn@wsj.com

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