Nate Creviston discusses moving to cash vs. purchasing equities during a recession with InvestmentNews

Tuesday, February 7, 2023 |

In the immediate wake of the worst year for balanced portfolios since 2008 and the worst year ever for bonds, and against the backdrop of a looming recession, investors are once again weighing their options regarding allocations to cash.

Despite wide-ranging bullish outlooks for the 2023 that cite slowing inflation and likely just one more interest rate hike, the reality of economic uncertainty combined with money market yields reaching 4% at some online banks has made cash a tempting alternative to risk assets.

“The chaos of the last 12 months has clients asking whether or not they should move to cash or into more conservative investments,” said Eric Amzalag, founder of Peak Financial Planning.

Amzalag said the growing talk of recession has not helped his efforts to keep clients focused on longer-term investment goals.

“In response to the chaos of the last 12 months, I have taken a more active management position within clients’ accounts,” he said, with “more proactive harvesting of gains in clients’ winning positions and redistributing that periodically to opportunities that have gotten cheaper over the past 12 months.”

Amzalag has also embraced a more conservative allocation strategy that is “heavily positioned in cash and short-duration U.S. government bonds.”

“We are very underweight equities and plan to redistribute profits from our longer-duration bond positions into equities as bonds go up in value and equities go down in value,” he said.

For Dennis Nolte, vice president of Seacoast Investment Services, loading up on cash is not new to 2023.

“We’ve been 35% to 50% in cash most of the last two quarters,” he said. “Clients are absolutely not committing new capital to equities or bonds, but certainly are paying attention to what is happening with their cash.”

Nolte cited clients recently asking about getting a 5% yield for a 15-month certificate of deposit or wanting to be invested only in short-term Treasuries.

“People are yield-shopping for their cash and feeling no pressure to add risk right now,” he said. “We agree with them.”

But even as cash finished 2022 as the second-best performing asset class behind commodities, some advisors are pushing back on the temptation to seek shelter.

“It is reasonable for clients to hold cash for expected expenses over the next couple years given how close money market rates are to short-term bonds,” said Seth Mullikin, founder of Lattice Financial. “However, it does not make sense to hold cash with the intention of timing the market.”

Nicole Wirick, founder of Prosperity Wealth Strategies, isn’t buying into the instinct to rush to cash and the philosophy that investors “need to do something to fix the situation.”

“It’s our human nature to want to solve problems, however, this basic human tendency can be destructive when it comes to investing,” she said. “I use this opportunity to pause and remind clients that volatility is a normal and expected part of the investing. I then refocus the conversation on long-term goals and illustrate how short-term, emotion-driven reactions to the market can derail a disciplined long-term plan.”

Nate Creviston, Manager at Capital Advisors Ltd., takes the approach of trying to keep clients looking forward instead of back, but keeps an eye out for cash management opportunities if that’s the only place clients feel comfortable in this market.

“Our clients are not moving to cash; if anything, now could be an advantageous time to buy stocks,” he said, citing the stock market’s history of strong rebounds. “The returns after 25% market corrections average to be up 27% after one year, up 45% after three years, up 93% after five years, and up 238% after 10 years.”

Of course, for those clients who have shorter time horizons or just can’t stomach the current market volatility, Creviston said he would be allocating to Treasury bills.

“If a client is set on moving to cash, we would currently be purchasing Treasury bills that are yielding between 4.3% and 4.5% for a two- and three-month maturity,” he said. “This is far more yield than you’ll find in a traditional bank account or most online high-yield savings accounts.”

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