Blog & News
Less Cash in Your Portfolio Yields More Money in Your Pocket
Dave Wilder CFP®, CTFA, MST, AIF®, CEPA
Tuesday, December 3, 2019
Our firm is committed to
looking for ways to add value to client relationships. The intention of this
blog is to draw attention to one of the little details in our implementation
that adds value, by effectively managing the cash targets within client
portfolios. Most clients do not need to allocate funds to cash (other than for
emergency reserves), especially if they are currently in their working years
and are making deposits into their investments. Even during retirement, a
portfolio generates dividends, interest and capital gains, often sufficient to
meet a large portion of the cash need. So when we see new clients come to us
who have cash targets, sometimes as high as 10-20% of the portfolio, we have
had to ask ourselves why this occurs.
We believe these large cash targets are typically not for the benefit of the client, but instead is a benefit to their investment advisor. As you can imagine, to keep track of cash needs for a large set of clients can become a daunting task, especially as withdrawals and contributions are made on a regular basis. Also, when portfolios are rebalanced, the amount of sales and purchases must be closely managed to avoid potential for trade errors that could cost the advisor to make the client whole. This is particularly true during highly volatile days when values can change substantially. The simple solution of course is for the advisor to always maintain a larger amount in cash to cover these and other unforeseen circumstances. The problem with this simple approach is having unproductive funds that could otherwise be working in the portfolio to generate returns. For example, a portfolio with a value of $1 million, with a 5% weighting to cash, will result in $50,000 earning a potentially negative return net after fees. However, if that same cash position were to earn 8%, that would generate an additional $4,000 a year.
At Total Wealth Planning, we manage these and many other details to ensure we can deliver added value to each client. We have invested heavily in our people, process and technology to allow cash targets to be kept to a minimum. The end result and goal is to see client portfolios working as hard as they can. If you would like to learn more about this or other ways we successfully add value to our clients, please feel free to contact us for a complimentary, no-obligation meeting by emailing us at email@example.com or by calling our office at 513-984-6696.