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Is it time to move to a high cash allocation in portfolios?

Posted on 24 March 2013 with 1 comment from readers

Perhaps a rather less hysterical approach than to say ‘Sell, sell, sell!’ is to advocate the case for investors shifting a higher proportion of their portfolios into cash. We know interest rates on deposits are very low but this is the safest place in a storm for most investors unless they live in Cyprus this week.

Yes we like gold as a safe haven asset too but cash is still going to be the safest place to hold money in a big storm like a stock market correction or a bond market crash. ArabianMoney knows the sound of a bond market crash approaching when we hear it.

Bond crash coming?

That was the bell ringing last week on the Emirates Airlines Islamic bond listing on the Nasdaq Dubai. That’s the Dubai Government cashing in on cheap money and they only ever sell at the best prices! It’s a death knell for the bond market globally. How long this will take is a moot question but the rocky shore is at least in sight.

If and when global interest rates go up, asset prices will come down. For bonds that is automatic as the bond value is determined by global interest rates, nothing else matters. Emirates might be the world’s best airline by far and still its bonds will fall in value in this scenario. Interest rates control asset values.

It’s about to happen in Hong Kong where the government has just pushed mortgage rates higher and house prices are predicted to fall 20 per cent this year. So what do you want to hold to protect yourself if interest rates go higher and that pops the bubble in bonds and stocks? And be under no illusion, equities are only high because bond yields are so low, stocks will collapse with bonds.

Well cash or gold as an alternative currency are the answer. If bonds and equities fall by half in value then your cash will buy twice the amount than before the crash. Precious metals could also take a temporary dive as they did in 2008, so cash is the safest option.

Fed policy consequences

This is most decidedly not what the Federal Reserve wants you to do. Its whole post-2008 policy has been to artificially lower interest rates to attract investors into riskier assets. The problem is that eventually all these spinning plates just have to come crashing down when interest rates head back up as market forces will always dictate in the end.

So switching money out of these overinflated asset classes and back into cash for a period might make a lot of sense now. You are consolidating and protecting your assets rather than exposing this money to a lot of risk for potentially very little additional gain. Don’t get greedy, take your profits and be ready for the next round of bargains.

This article will be continued in the next edition of the ArabianMoney investment newsletter that considers the right instruments to choose to best follow the strategic approach that we outline on this website (subscribe here). We think a major turning point is close at hand.

1 Comment posted by readers:

Comment by Tiu - 24 March 2013

Shouldn’t the last sentence in the penultimate paragraph say “Get greedy, take your profits and be ready for the next round of bargains”?

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