If you are like me, odds are you have at least one or two tools in a kitchen drawer. And because this drawer is more accessible than my toolbox in the garage, I often attempt to use a screwdriver as a hammer. Or a pair of pliers as a screwdriver. Generally, the results are not optimal, and using the wrong tool occasionally leads to frustration and often a bruised hand.
Unintended consequences can occur when we use tools for jobs they weren't built to perform. We need to consider whether we're using the right tool for a job – and such consideration extends to our investment toolbox as well.
Asset classes function as the tools in investors' toolboxes. According to Investopedia, the Asset Class is “a group of securities exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same laws and regulations.” The three main asset classes are equities (stocks), fixed-income (bonds), and cash (money market instruments). We have great conversations regarding stocks and bonds when working with investors, but it seems cash always gets a bad rap.
“You get paid to manage our investments, not to hold cash.” We've heard that statement on numerous occasions over the last 20-plus years. What is hard for all of us to remember is that we must manage for all possible economic outcomes. Like everyone, we hope for the best, but we must also manage for the worst. As professional money managers, we believe that investors should always have each tool in their toolbox. Sometimes investors need more equities, sometimes more bonds, and occasionally more cash.
Several parts of the marketplace seem to be suggesting a cooling-off period in the short term. Along with that, many folks would argue that interest rates being this low will be a long-term reality. And on the other hand, we are seeing a short-term inflation spike on goods due to last year's global pandemic. It might not feel possible, but these types of dispersions create opportunity at some point, and we want to be ready with the right tools to take advantage of the potential growth.
When it comes to getting the job done, we often don't want a hammer but rather a nail in the wall. We only look to the hammer because it is the best tool to perform the job. When markets begin to gather their senses or at the very least start to trade with a dose of reason, opportunities in the areas mentioned above are likely to arise. To accomplish your investment job, you must first determine when the time is right (investor discipline and know-how), and secondly, you need the right tools. You must be prepared to trade cash for stocks or bonds based on the opportunity when it is presented.
This doesn't mean liquidating your portfolio and wait for the sky to fall. That would be simply using a single tool. Simply put, investors should diversify their tools and include cash as an asset class. Opportunity comes from being prepared, and that means you need the right tools for the job.
Joseph A. Clark is a Certified Financial Planner and Managing Partner of The Financial Enhancement Group, and an SEC Registered Investment Advisor. Contact Joe at yourlifeafterwork.com or 800-928-4001. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by the Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated. World Equity Group, Inc. does not provide tax advice. For tax advice consult with a qualified tax professional.