Cash isn’t always trash. In fact, there are times when cash can glitter and save your client from a market or personal disaster.

Besides the relatively rare periods when cash has actually been the best-performing asset, having some cash on hand at other times might ensure that an advisor can preserve a plan. That’s because some clients making progress in reaching their goals are actually quite vulnerable—in being cash poor. And their investment progress could come to a halt in those cases because they have to make difficult short-term moves.

That’s the fear of some advisors, who have various approaches to avoid selling winning investments prematurely.

Todd Ericson, an Overland Park, Kan., advisor, says it’s important to anticipate these potential cash problems.

“Prior to each quarterly meeting, we ask our clients to give us their current bank balances,” he says. “We then determine if they will need additional cash from their portfolio, and if so, develop a plan to make sure our clients have the cash they need when they need it.”

How does one balance the goals of growth with the need to have enough cash on hand to handle periodic emergencies? And what is the best way to hold the cash part?

Ericson says clients should have 12 months’ worth of cash on hand to avoid having to sell securities during a market dip. The cash component of their portfolios, he adds, should be discussed at every scheduled client meeting.

Where should it be stored?

“I use money market mutual funds and/or short-term bond funds,” says Edward Snyder, an advisor in Carmel, Ind. “This gives some yield on the money but also provides the stability you're looking for from a cash investment.”

Michelle Buonincontri, an Anthem, Ariz., advisor, says those with access to the Thrift Savings Plan can use its G Fund—the Government Securities Investment Fund—which “makes a great cash component of a retirement account, as it is guaranteed, with an interest rate equivalent to a long-term security.” She says it is currently yielding 2.25% in October 2019.

Cash is not a component of the portfolios managed by David Bize, an Oklahoma City advisor. However, he makes sure his clients have enough emergency cash reserves or sufficient cash flow from earnings, pensions, Social Security, etc., for an applicable time frame.

He says his client portfolios are fully invested without cash. He uses money market funds paying 1.9% or better as emergency cash reserves.

Emergency Money

But William Jerome, an advisor in Scotia, N.Y., says some clients have large amounts of cash in very low paying money market accounts. They think they’re getting a deal, but they are not.

“I have to tell them that with inflation they are actually losing money,” Jerome says. He says there’s a better way of keeping some cash on hand: He stashes cash in short-term ETF bond funds that pay about 3%.

“You can use a low-cost broker and you’ll have the money within a day,” he says.

Jerome, who also doesn’t like to count cash as part of a portfolio, says some clients simply want to keep $10,000 to $15,000 on hand for emergencies.

However, despite the pathetic performance of cash over the last few years, there is a case that can be made for this “trashy asset” (besides its use in avoiding shortages).

There are still periods, even as long as a decade, when cash is a better investment than stocks, according to a LendingTree.com study. In a recent 51-year period, cash was the best performing asset 30% of the time, the study found.

Hard times for equities often mean all that glitters is not financial assets, but instead garden-variety cash, such as certificates of deposit (CDs).

“Unsurprisingly, CDs outperform stocks more often during economic recessions and underperform during economic expansion, although there are pockets of exceptions,” according to the study.

Indeed, Anthony Ogorek, an advisor in Buffalo, N.Y., believes clients should have cash for a variety of reasons.

“There’s a time and a place for every asset class, especially one that is much less expensive than alternative assets,” Ogorek says.

He uses short-term Treasury Bills as his cash portfolio diversifier and sometimes opts for cash because, it “is much less opaque than other assets. And because cash is highly liquid, it can be a relatively attractive asset for a small number of clients.”

He says that in some of his clients’ portfolios, cash is about 5%. This can make sense for both the conservative client who wants to preserve wealth, but also the younger client who fears stocks are smelling up the investment world, according to Ogorek.

Then you can use some of your cash reserve to take advantage of sudden investment opportunities, he says.

More To Life Than Stocks

The author of the LendingTree study also says it is important to remind investors that over-relying on any one asset class, such as equities, is dangerous.

“We did this study as a wake-up call to make people understand that one needs more than just stocks and bonds as a diversifier—that stocks and bonds can sometimes go down together as in 2008,” says Brian Karimzad, vice president of research for MagnifyMoney, a LendingTree subsidiary.

He adds that, for the average investor, cash as a part of a properly diversified portfolio can be important for a number of reasons. A cash reserve can be critical in hard times—when someone has lost a job, for instance.

“Now that brokerage houses are paying next to nothing on cash as a way to offset the cost of commission-less trades, it is more important than ever to seek out non-sweep money fund alternatives,” Karimzad says.

Cash, Ogorek adds, can also be an effective investment for when equities are cheaply priced and the client can take advantage of it.

And cash can also save the client when stocks are pricey, Karimzad says.

For instance, six-month certificates of deposit, the LendingTree study said, did very well at the beginning of the period known as the lost decade. That’s when CDs had the longest time of beating stocks, a 33-month period from 2000 to 2003.

“The one-year return of six-month CDs beat the one-year return of stocks for 33 consecutive months,” according to the study.

That’s almost three years when stocks were “trash.” To rephrase the Bard of Avon, all that glitters is not equities, often you have heard this told.