Where has all the cash gone?

A recent Advyzon report shows that cash is no longer king.

According to its new white paper, the end of 2023 may have finally signaled a move away from the asset class, with allocations having topped 10 percent before 2021.

After the S&P 500's strong year in 2021, cash allocations fell to 9.5 percent, “given increasing fears about inflation.” In 2022, it dropped even further to 6.7 percent before falling again to 4.6% at the end of 2023.

Paul Schatz, president and founder of Heritage Capital, says “it’s not surprising” given how the stock market performed overall last year.

“2023 was supposed to be this economic Armageddon, then the markets ripped out of the gate. They paused over the summer, they bombed in October, and they ripped even more into year end,” Schatz explains.

“People who had big cash allocations coming out of 2022 were woefully wrong, and at the end of the year, in the fourth quarter, you could see all those wrong way bears throwing in the towel. That's why you saw cash allocations fall so precipitously.”

So where has all the cash gone since then? Schatz says it’s gone into the mega cap tech stocks.

“That's where I think it's going to stay until people get their faces ripped off again,” says Schatz. “It's the classic case of behavioral finance, which is you buy whatever has done the best. You don't buy value and you don't try to rotate. That’s where I think money has gone and it will go until proven otherwise.

“Until you get a period worse than last Monday, people will continue to move away from cash. But cash is yielding 5 to 5.25 [per cent] in money markets ... in treasuries, the risk-free rate above five is juicy and appetizing for somebody who's really conservative. They should enjoy it now, because the Fed is going to start taking it away in the month,” he added.

The percentage of cash that clients hold is a complex issue, says Michael Halloran, head of business development and partnerships at MaxMyInterest. He explains the percentage of cash that people report as being part of their total portfolio, or even their total net worth, can go up and down quite frequently.

Halloran highlights the Capgemini World Wealth Report, which found the average HNW household in North America keeps 24 percent of their liquid assets in cash and cash equivalents.

“This suggests that the majority of client cash sits outside of the portfolio, often in large brick-and-mortar banks. The challenge for advisors is that this cash is often out of view, under-insured, and under-earning,” says Gary Zimmerman, MaxMyInterest’s founder and CEO.

Zimmerman added the firm often sees advisors typically aim for single digits of the investment portfolio to be held in cash, largely for the purpose of portfolio rebalancing and the payment of quarterly management fees.  

In terms of how cash plays a role in the portfolio, he admits that it’s dependent on the client as some clients keep more and others keep less. The reason that cash may be going down, he believes, is as interest rates have come down and to maintain yields, investors are putting more funds into higher risk and short-term bonds, to name a few.

“We see cash as the overlooked asset class,” says Halloran. “While attention is sometimes paid to the percentage of the portfolio as it goes up and down as the other parts of the market fluctuate, we think the biggest opportunity for most clients of advisors and most individuals, is to earn a competitive return on their cash,” adding that one of the smartest ways to keep cash is to keep it in a competitive, high yield online bank account.

Both Schatz and Halloran caution advisors and investors alike to not react to market performance, as "it’s still important to keep cash earning the most that it can and have a competitive rate," says Halloran.

“There are plenty of super low risk ETFs that simulate treasuries and cash equivalents,” says Schatz. “Don't be lazy, unless you're super active in the markets."

"People who sold last Monday are doing it emotionally and wrongly,” Schatz added. “If I wasn't smart enough to take action before Monday, I wasn't going to compound a problem with a problem.”