Spring Cleaning for Your Investment Portfolio - Total Wealth Planning

Spring Cleaning for Your Investment Portfolio

Spring is here and it is time for Spring cleaning!

By Dave Wilder, CFP

Each Spring a popular family tradition is to clean up the house and garage to get rid of unwanted items, while at the same time possibly selling them either on-line or by having a garage sale. The extra “found money” can sometimes be significant. Another less obvious spring cleaning ritual that is worthwhile, and frequently overlooked, is to evaluate your investments for an inconspicuous drag on investment performance: CASH!

Having access to cash is often considered to be a good thing, especially so that it is available for unexpected expenses or emergencies. Cash can be a hinderance, however, since interest rates are at such low levels. The resulting drag on investment performance can even jeopardize long-term financial goals. Therefore cash balances should be kept to a minimum. The intention of this blog is to expose those areas where cash may be present, and how to reduce the exposure, in order to improve long term investment results.

First, if you are investing in mutual funds, investment managers often have a high allocation to cash so that funds are available when investors request distributions. The a weighting can sometimes be as high as 5-10% of the fund’s assets. For example, the iShares US Aggregate Bond Index Fund, as of this writing has a cash weighting of 7.59%. This is likely contributing to the fact that is in the bottom 80% for investment performance when compared to other bond funds. The actual amount for any mutual fund investment can be found by reviewing the Fund’s annual report.

Second, if you work with an investment advisor, or even if you manage your own account, it is not uncommon to maintain a 5-10% weighting to cash. This can be for purposes of having funds available when it is needed to meet living expenses or in order to pay the advisor’s management fee. We believe these large cash targets are typically unnecessary and cash can be raised in other ways as it is needed, improving investment results. When an investment advisor keeps a large amount in cash it is typically not for the benefit of the client, but instead just makes it easier for the advisor so that they will not have to look at an account as frequently. As you can imagine, to keep track of cash needs for a large set of clients can be a daunting task, especially as withdrawals and contributions are made on a regular basis. Although it is a simple solution for the advisor to maintain a large amount in cash, it comes at the detriment of investment returns since the cash could otherwise be more productive, and provide better investment returns.

Combined, when considering the cash in a mutual fund, in conjunction with the cash held in the account, the weighting could be as high as 20%. For purposes of illustration, consider a portfolio valued at $1 million. If the overall weighting to cash is 20%, this results in $200,000 earning little or no return. However, if that same cash position were to earn 8%, that would generate an additional $16,000 a year. The end result is that an investment advisor could earn their management fees simply by ensuring that cash in the account is kept to a minimum.

At Total Wealth Planning, we manage these and many other details to ensure we can deliver added value to each client. We have invested heavily in our people, process and technology to allow cash targets to be kept to a minimum. The end result and goal is to see client portfolios working as hard as they can. If you would like to learn more about this or other ways we successfully add value to our clients, please feel free to contact us for a complimentary, no-obligation meeting by emailing us at info@twpteam.com or by calling our office at 513-984-6696.

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