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The wrong perception of fully invested

on Tue, 09/27/2016 - 14:30

I remember way before I became a financial advisor, I have heard how much cash Larry Sarbit (a famous fund manager, he was at AIC at the time) would hold a large amount of cash while unit holders would be yelling and screaming “why are we paying you to hold cash?!”

Over all these years, Sarbit had never changed a bit on his money managing style (http://www.theglobeandmail.com/globe-investor/personal-finance/larry-sar... and http://www.fool.ca/2013/10/31/larry-sarbit-on-holding-cash-and-what-he-t...). 

We had been always hear people talking about fully invested (an article from Forbes - which was an interview with a portfolio manager…) 

Traditional portfolio consists of 2 elements: stocks and bonds. In which, the common approach is 60/40 (60% in stocks and 40% in bonds). Cash was never viewed as an asset class…

I am nowhere close to a money manager but occasionally, when I feel uncomfortable, I will hold cash for clients and leave the money in a high interest savings account (like Manulife Bank Advantage Accounts, majority of the time offers better than big 5 banks’ rate, compare today’s rate) It’s quite funny that I came across a document which analysis and confirmed taking cash as an actual asset class benefits your portfolio.

Furthermore, we all know how important diversification is. However, we diversify mostly are only among sectors and countries, not really among asset classes (some of us would have invested in real estate, which is now a dangerous asset class, as I had been saying before).

The study included not only cash but added REIT together with gold as asset classes. Compare to the 2-asset-class portfolio, this 5-asset-class portfolio have substantial improvements on standard deviation and sharpe ratio with similar return. 

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