“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.