(PUB) Investing 2015

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Cash Is Not Trash The Contrarian | Russel Kinnel

not on strike. Stocks seem pricey to me, but I’ve seen too many people get dogmatic about something that’s far too hard to predict. In the investment world, it seems like the folks who predicted the last bear market keep trying to predict new ones, and they keep being wrong. Meredith Whitney and John Hussman are among those who have more than given back their bear-market outperformance by seeing disaster around every corner. blueprint, and market shifts should only lead to changes at the margins of your portfolio. You don’t want to veer off your carefully designed course no matter the environment. Investors who held the course after 2008 recouped their losses in a few years, but those who panicked are still trying to make it back. When Not to Raise Cash That’s not to suggest raising cash is for everyone. For instance, a relatively young investor should only have the emergency cash and nothing more because the opportunity cost of a lifetime of compounding is enor- mous. In addition, a market setback is going to sting less given the long time in which to recoup losses. If I held a lot in short-term bonds, as I did recently in the form of Fidelity Municipal Income 2015 , I would also hesitate to raise additional cash. You don’t want too much of your portfolio tied up in very low- returning investments. While short-term bonds and short-term bond funds are not perfect cash substi- tutes, they are pretty similar in risk and yield. Finally, I would show some restraint if I expected a lot more cash to be coming through the door in the form of a bonus or sale proceeds from investments or housing. In that case, your challenge is keeping cash from getting too large. K This leads to a more general principle, which is that everyone needs to have some sort of asset-allocation

In mid-July, Fidelity Municipal Income 2015 FMLCX will liquidate, leaving shareholders with a chunk of new cash to invest or spend. As one of the few holders of the fund, that meant my cash holdings will grow by a fair margin. But I’m not in a rush to reinvest. Years of low interest rates mean there are few bargains out there. If that fund had not matured, I could have built cash from dividends and other forms of income. Simply refraining from reinvesting dividends and capital gains, especially in taxable accounts, is a fine way to build cash. When you are building a cash stake, financial planners typically recommend something like six to 12 months’ worth of living expenses so that you are prepared for emergencies like job loss, costly home repairs, or medical bills. For retirees, that recommen- dation typically goes to one to two years of living expenses. But it can also be useful to hold a little more than that in your investment portfolio. At times like this, 5% or 10% in cash is not a bad idea. Beyond that, I wouldn’t go to more than 10% in cash, because there’s a big opportunity cost to missing out on market appreciation. So, in today’s environment, I’ll just hold some cash so that I’m ready for a sell-off. Such a sell-off could come in high-yield, where the market has come under renewed pressure because of commodity weakness, outflows from junk-bond funds, and rising rates. It could come in Europe, where the situation is Greece is growing increasingly ugly. (On the plus side, financial markets have had years to prepare for this scenario, and that usually limits the damage done.) There is already quite a sell- off under way in China, though stocks don’t yet look cheap. If my cash pile grows by any more than it has, I’ll probably put it to work in those areas and then go back to investing across core areas. I’m continuing to contribute to my 401 (k) every paycheck, too. So I’m

Our Contrarian Approach I go against the grain to find overlooked funds that may be ready to rally.