Coronavirus may change how investors look at cash

(Originally published in Bond Buyer September 22, 2020)

The conventional wisdom has been that clients should keep six to 12 months of living expenses in cash in case of job loss or another unexpected event. While that is sound advice, in the age of COVID-19, this may no longer be enough.

Some people think of cash narrowly — as a form of personal working capital necessary to cover day-to-day living expenses. But it’s worth revisiting this viewpoint, particularly in a midst of a pandemic of uncertain duration.

“For many clients, a much larger cash cushion may be advisable.”

Cash plays a much larger role in our portfolios, and in our psyches, than we might care to admit. As a result, for many clients, a much larger cash cushion may be advisable, to serve as an important source of stability and optionality. Beyond the necessity of keeping cash on hand to meet ongoing obligations, having a larger cash cushion enables clients to mentally-withstand a much broader range of events, from personal dislocation to market volatility.

Staying the course

As the COVID-19 pandemic unfolded, it became apparent that many aspects of our daily lives would soon be in flux. While many clients became concerned by a correction that drove down market indices by more than 35% in a matter of weeks, astute advisors were able to hold clients’ hands and help them stay the course. But for some clients, the volatility was too much to bear, and they strayed from their long-term plan and sold securities. Within weeks, the broad market indices had recovered, and in some cases, surpassed their pre-pandemic highs. Unfortunately, those investors who sold in a panic lost out.

Having a larger cash cushion can help clients stay true to their long-term strategies and avoid selling at precisely the wrong time. Holding cash can thus help clients boost portfolio returns simply by providing the psychological insurance necessary to remain invested.

Many months into a pandemic that still shows few signs of abating, and with an unemployment rate hovering around 20%, a six-month cash cushion may also be insufficient to bridge the gap for those who experience job loss, or for business owners who may not be collecting the monthly distributions to which they had become accustomed in a pre-COVID world.

Those fortunate enough to already have several years of operating cash on hand are able to think longer-term. In addition to being able to support their families and businesses, they can make new investments at a time when others might shy away from providing capital.

The ability to make investments during downturns offers investors the opportunity to earn outsized returns. Cash isn’t just a hedge; it’s the ultimate in option value, providing the ability to invest when capital is otherwise scarce.

Personal flexibility and optionality

In cities across the country, many people are re-thinking their desire to live in close proximity to their neighbors. With parents working from home and children attending school remotely, many families are placing a premium on having more space — both indoors and out. As a result, suburbs are experiencing a renaissance as city-dwellers are relocating to ride out the pandemic.

Those with extra cash on hand have the privilege of being able to deploy it in an instant to rent or purchase another home without having to sell their existing residence in a panic. Advisors who can help clients through these emotionally challenging times can earn clients for life.

In summary, cash is much more than working capital; it should be considered a strategic asset class. It can protect clients against the unexpected, help them earn higher returns by staying the course, achieve greater personal flexibility, and make new opportunistic investments at a time when others are fearful and capital constrained. It’s no wonder why clients are increasingly asking their advisors about cash.

The Rush to Buy Toilet Paper Has All the Hallmarks of a Bank Run

Ellen Corby and James Stewart in “It’s a Wonderful Life”

For those struggling to unglue themselves from the constant coverage of the novel coronavirus, or for anyone who has visited a grocery store lately, it would be difficult not to notice that a few key staples — including toilet paper — seem to be in short supply.

A recent Bloomberg article by Millie Munshi, Megan Durisin, and Corinne Gretler notes that — while there is plenty of food — the logistics systems used to deliver food throughout the country (and around the world) and the ability to get those products to shelves is strained under a sudden surge of customers stocking up on food and supplies.

It turns out that the problem isn’t supply — there is plenty of toilet paper in the world. The issue is the sudden surge in demand driven by the fear that, with everyone else rushing to buy toilet paper, there won’t be enough for all of us. This, in turn, drives people to buy more than they normally would out of concern for scarcity. In other words, the shortage of available supply isn’t driven by need, it’s driven by fear that others will get to the shelves first — a sort of self-fulfilling fear. President Franklin D. Roosevelt may have summed it up best when, in his first inaugural address, he said the “only thing we have to fear is fear itself.” Getting consumers to believe that there will be sufficient supply — even if we can’t be certain that there will be — should be sufficient to restore calm, which in turn would restore sufficient supply on store shelves.

This same underlying dynamic is what drives bank runs, perhaps visualized best by Frank Capra in “It’s a Wonderful Life.” Under the Fed’s Reserve requirements, banks are required to hold 10% of checking deposits in-branch, informed by probabalistic models that suggest that such cash reserves are sufficient to meet the needs of customers withdrawing funds on any given day. However, if customers become concerned that their neighbors will rush to the bank to withdraw funds, the desire to withdraw one’s own funds becomes more acute. Fear and panic become self-fulfilling.

The FDIC was instituted in the wake of the Great Depression to help address this concern. By backstopping deposits by the full faith and credit of the U.S. Government, depositors no longer needed to worry about whether there would be enough cash in the bank, as even in the unlikely event that a bank were to fail, customers would be fully repaid by the FDIC. The FDIC thus remains a crucial component driving the safety and stability of our banking sector.

There is a notable exception to the protections afforded by the FDIC: it is limited, currently capped at $250,000 per depositor, per account type, per bank charter. This means that if you hold accounts at a bank (checking, savings, CDs) that, in aggregate, exceed $250,000, you may not be fully protected and could suffer loss of principal in the event of bank failure.

There’s an easy way to protect yourself: spread cash across multiple account types (individual, joint) and multiple banks. Services like were designed to help you do just this, automatically monitoring your accounts and helping keep funds below the FDIC limit at each bank. With a market-leading rate of up to 1.71% APY, Max can also help you earn higher yields on your cash, automatically.

When fear grips markets — whether the market is for toilet paper or bank deposits — the perceived risk of scarcity can lead to a vicious cycle that creates the scarcity that is feared. During these challenging times, the better we’re able to promote rationality over fear, the better we’ll all manage through as a society.