Cash plays an important role in the Bedokian Portfolio, a pool of liquidity that could be deployed to the other four asset classes (equities, real estate investment trusts or REITs, bonds and commodities). Cash injections, through regular contributions from disposable income, dividends from equities, distributions from REITs, coupons from bonds and interest from cash, contribute to this pool.
What if one could get more bang for the buck from this liquid pool?
Sounds a bit contradictory as cash is meant to be readily deployable capital. Unless the cash is in physical form and locked away in a safe or a metal container of a famous powdered malt-drink, it is still earning something depending on where it is.
Picture generated by ChatGPT
Where Else To Put Cash?
The first obvious place is the basic bank savings account, which is around 0.05% based on what I had seen from bank websites. The next bank offering would be fixed deposits that offer a higher interest rate but with locked-in periods ranging from one month to three years.
Besides banks, there are other means of holding cash and still earning something. Six-month and one-year Treasury Bills (T-Bills) are issued by the Monetary Authority of Singapore (MAS) and can serve a similar purpose to a fixed deposit, although they are government securities rather than bank deposits. There is another financial instrument issued through MAS, the Singapore Savings Bonds (SSBs), a 10-year savings plan with incremental interest rates over time.
Another mention is money market funds, or MMFs. These are unit trusts that invest in short-term debt securities such as T-Bills, short-term corporate debt and fixed deposits. Hence, they combine several cash management instruments within a single investment vehicle.
Not All Are Equal
Safes, bank accounts, T-Bills, SSBs and MMFs are ways to hold one’s cash in the portfolio and the latter four generate some return, albeit lower than the other asset classes. However, they are different in terms of their structures and characteristics. Bank savings accounts and fixed deposits are insured up to SGD 100,000 by the Singapore Deposit Insurance Corporation (SDIC), subject to conditions. T-Bills and SSBs are issued by MAS and backed by the Singapore Government. MMFs are investment vehicles, so they are subject to market forces and are not guaranteed in the event of a collapse, though the latter happening is very remote.
My take is that the more important aspect of cash is not about how much yield I can earn, but rather the liquidity of the various mentioned instruments. For me, liquidity matters more than squeezing out every last iota of return.
Monies from bank savings accounts can be withdrawn anytime. MMFs can generally be redeemed within a day or two. SSBs are redeemed monthly, while T-Bills and fixed deposits will have to wait till the end of the tenure, provided the former are not sold in the secondary market, and the latter are not closed prematurely. Looking across these cash management instruments, there is generally a trade-off between yield and liquidity.
Any Compromise On This?
Choosing a place to hold cash for the portfolio is like considering the "liquidity of the liquidity". My take is, as a ballpark, a holding period of no more than six months is preferred; this is the time frame where a typical passive investor would rebalance his or her portfolio, so a six-month T-Bill or fixed deposit would allow the funds to become available again for deployment. Also, other recent streams of cash received from the portfolio could be utilised first, and this may lead to a probable sub-division of cash into liquid (bank savings accounts and MMFs) and slightly less liquid places (T-Bills, SSBs and fixed deposits), or maybe even in safes and tin cans (though a trip to the automated teller deposit machines is needed for this).
Final Take
There is a tendency for investors to judge every asset class by its returns. Equities are expected to grow. REITs are expected to generate distributions. Bonds are expected to provide stability. It is only natural, then, to expect the cash component to chase the highest interest rates available.
But perhaps that is asking it to do something it was never meant to do.
One lesson I have learnt over the years is that every asset class should have a clearly defined purpose within a portfolio. Problems often arise when we expect one asset class to behave like another.
In the Bedokian Portfolio, the role of cash is simple. It is not there to outperform the other asset classes. It is there to provide a readily deployable pool of liquidity whenever investment opportunities arise. If it can earn a modest return while waiting, that is certainly welcome. But if chasing a slightly higher yield means sacrificing that flexibility, then perhaps the extra return is not worth the compromise after all.
Try out the Growth Indicator, Equities Indicator and S-REITs Indicator screening app for FREE. You can use it as a web page or save it as an app-like bookmark on your home screen of your computer, tablet or mobile for faster access.
References
https://www.mas.gov.sg/bonds-and-bills
https://www.investopedia.com/terms/m/money-marketfund.asp
No comments:
Post a Comment