Many prospective clients - and some clients who have held cash outside of their managed assets with us - have asked what they should do with money they've been holding in cash particularly after the market has exhibited a strong rally. This is not a new question as I have been asked it repetitively the past eight years, particularly at the beginning of many New Year's since the financial crisis, as individuals again focus on their budgets and investments after the holiday festivities are finally complete.
Obviously, any assets held in cash the past year (or most of the previous eight years for that matter) have missed extraordinary returns as we have ranked among the top global investment managers with an approximate 17% return during 2016. However, hindsight is 20/20 and we could just as easily have been down 17% during the year. Though I have no idea what the short term brings, I am more concerned that those who sat in cash missed a 5 ½% yield from the dividends and interest which our portfolio provided during 2016. For those of our clients and investors who don't need cash from their portfolio (as I don't), we are able to utilize the dividends and interest to purchase more shares of stocks and bonds - which can be incredibly powerful to compounded return over time. For this reason, I worry as little if our portfolios are up or down 17% in any given year as it has a limited impact on the long term success of our clients. Moreover, declining stock and bond prices do not impact the income of our clients who fund their retirement cash flow needs because dividend and interest payments remain relatively steady whereas price fluctuations cause portfolio values to vary widely. For example, though Caterpillar's stock price may increase or decrease in value during any given year, the dividend payment, though not guaranteed, will generally remain steady and importantly may increase over time with Caterpillar's earnings growth to help hedge against the insidious effects taxes and inflation can have our clients' retirements.
Though our firm is compensated based upon our clients' portfolio values, our clients' income does not change dramatically as long as Caterpillar (and the other 74 stocks we own) continues to make their dividend payments and Ruby Tuesday (among 80-90 other bonds) continues to make interest payments - though we know we will likely experience defaults as a risk to achieve potentially higher interest payments above the very low return currently available from cash/CDs/Treasury bills. Because a stock's price doesn't have an impact on the income it generates (in fact, the yield increases when the price declines), I actually prefer to have normal and healthy stock market corrections which enables us to utilize cash flow to repurchase shares at lower prices.
As a New Year's resolution, I would resolve to remain fully invested in the coming year and attempt to not worry about the inevitable market fluctuations which come from political and/or short term economic events as trading and market timing have proven to be hazardous to one's wealth!
I'd like to wish all of our clients and friends a happy, healthy and prosperous New Year!