Financial Planning - December 2012

PORTFOLIO
exotic investments > 92
new index landscape > 96
fiscal fears > 98

Cash Is Not
Trash
Tempted to leave this asset class
out of a portfolio? Don’t be swayed.
By Craig L. Israelsen

What place does cash ave in a portfolio? Some advisors tend todismissit— particularly in the current interest rate environment. But consider the impact of cash returns (best case, worst case and actual case) in a broadly diversified, 12-asset portfolio.

Cash has hardly been most everyone’s whipping boy. During the 34- year period from 1948-1981, the federal discount rate trended upward, rising to a now-astounding 13.42% from 1.34%. During this time frame of rising rates, the 34-year average annualized return for U.S. cash (as defined by three-month Treasury bills) was 4.49%.

Starting in 1982, the federal discount rate began its long descent. At the end of 2011, the federal discount rate was 0.75%. But even during the last 30 years (1982-2011), the average annualized return of U.S. cash has been 4.88% — slightly higher than during the period of rising rates.

HIGHS AND LOWS
The heyday of cash was in 1981, with
a one-year return of 15.58%. The low
point for cash is, well, now: For 2011,
the one-year return of cash (three-
month Treasury bills) was 0.05%.

Performance of a Broadly diversified
Portfolio (2002-2011)

Author’s 7Twelve Portfolio Asset Category (using raw index returns)

U.S. Large-Cap Equity U.S. Mid-Cap Equity U.S. Small-Cap Value Equity Developed Non-U.S. Equity Emerging Non-U.S. Equity Real Estate Natural Resources Commodities U.S. Bonds TIPS International Bonds Cash Author’s 7Twelve Portfolio