In times of excessive volatility clients worry about increasing cash as equity stock markets yo-yo up and down. Raising cash when all this volatility is happening can be counterproductive as the chances are that the volatility will be short lived when viewed against the holding period for a typical growth portfolio which is 5 to 10 years.
It is for this reason understanding what a clients liquidity requirements are from the beginning of a relationship is paramount. Keeping sufficient cash to one side to fund a year or mores income is essential. However, as sensible as this is, it comes at a cost, namely a drag on portfolio performance.
When equity markets react to seismic events such as a pandemic, war, or energy crisis they tend to overreact. This is very common, and the experienced Portfolio Manager will want to take advantage of this situation. Inevitably quality stocks get marked down with the bad, and some sectors such as manufacturing, finance or energy are caught up in the carnage as sector rotation takes place.
Having sufficient cash to take advantage of this situation is important but not if it is at the expense of a client’s potential income. Managing this delicate balance is not easy but for those managers who pride themselves of understanding their clients’ needs deciding whether to take action or just sit and wait is a judgement call.
In times of volatility such as we have recently witnessed experienced managers used by the investment team come into their own. Not getting caught up in the moment but taking a considered approach will in the long-term pay dividends. Knowing when to re-enter the stock market and deciding whether to ‘stick or twist’ is one that only the experienced can make.
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This article is for information only and represents the opinion of Reeves Independent Limited only and should not be seen as advice or a recommendation to act.
Please note that investments can go down as well as up and you may not get back the full capital invested.