3 Reasons to Consider Getting Your Cash Off the Sidelines

Help your clients weather market uncertainty and stick to their plan

Market downturns may prompt your clients to try to minimize their risk as much as possible. While that’s understandable, that approach may itself be more risky, since it could potentially impede their goals.

From knowing which stocks could do well in a recession, to having insights into where you could put your money right now, here are some key reasons why it’s important to think about moving your clients’ cash off the sidelines.

1. Your clients may lose potential gains if they reallocate from equities to cash.

If your clients are tempted to pull back on their equity allocations, consider the risks of not being invested when the markets start to recover. In order to hit their investing goals, it’s essential that they find the right balance between too much and too little equity exposure.

The risks of moving in and out of equities during market uncertainty

Risk comes from both sides; too much equity exposure may increase the risk of loss, whereas not enough exposure may cause "shortfall risk."

501001502002503003504004505002001200220032004200520062007200820092010201120122013201420152016201720182019202020212022$ ThousandsInvestor PortfolioWealth Reference Target60% Stocks / 40% Bonds

2. Fleeing to cash during high inflation may produce lower returns versus maintaining a diversified portfolio.

In periods of high inflation, your clients may want to move to what they assume will be the safest place: cash. But our data shows that a diversified portfolio of U.S. equity, international equity, and bonds beats an all-cash portfolio. And that goes for both high and low inflation periods.

Diversification is essential, even at the height of inflation

Periods of high inflation tend to lead to greater volatility and a challenging market landscape. Historically, however, fleeing to cash once inflation was already high failed to provide better returns over medium- and long-term holding periods. Over the past century, holding a balanced, diversified portfolio when inflation had already hit 4% (or above) far surpassed cash returns over the subsequent 3- to 10-year periods.

0%1%2%3%4%5%6%7%Annualized Real ReturnCashBalanced PortfolioCashBalanced PortfolioInflation < 4%Inflation > 4%Returns in the Subsequent Holding Periods:10 Years5 Years3 Years

3. Bonds have outperformed cash after the Fed halts rate hikes.

With compelling yields and attractive valuations, bonds are competitively positioned right now. And with data suggesting a mild recession or soft landing is possible, bonds can help you manage volatility.1 Equally important today as you consider positioning your clients defensively for what may lie ahead: bonds have historically performed better than money markets after the Fed stops raising rates.

Bonds have tended to outperform cash, post-Fed rate hikes

The year after a period of rising rates brought improved returns for bonds relative to cash. In 7 out of 8 instances, bonds outperformed cash over the 12-month period following the end of the federal funds rate hike cycle—by an average of 380 bps.

Total Returns 12 Months After End of Fed Funds Rate Hike Cycle

-5051015202530Oct-79May-81Aug-84Feb-89Feb-95May-00Jun-01Dec-186 Mo US TreasuryBloomberg US Aggregate Index11.3014.7617.129.2212.806.8316.867.0213.995.366.762.629.1011.3323.91-1.80

Ideas for where to invest during a recession

Given the uncertainties ahead, a generally defensive allocation—with commodities as a portfolio diversifier—could be appropriate.

These funds are actively managed by experienced portfolio managers who have demonstrated long-term success over various business cycles.

These funds provide some exposure to credit sensitive sectors to generate income, while others provide for diversification and potential downside mitigation.

These funds are opportunistic based on current conditions, and they may provide incremental exposure to certain factors that may influence the markets.

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