Is Cash an Investable Asset Class or Not?

Is cash an investable asset class or not?

I say it is not.

Cash should be used as either an emergency fund outside of a portfolio (in a bank) or as a tactical position for those who choose to be tactical. But as a permanent sleeve of an asset allocation portfolio, we do not believe that cash makes sense. We tell clients to keep three to six months living expenses in cash on hand, but that anything beyond that is purely emotional or closet market-timing.

Over the last 24 hours, a huge disagreement has erupted between Adam Nash, founder of the Wealthfront roboadvisor, and the Charles Schwab Corporation, which has just unveiled a robo service of its own, Schwab Intelligent Portfolios.

At the heart of the argument is this: Schwab is making its service free to investors, with the caveat that it will be using its own smart beta ETFs (with what Adam calls higher internal expenses). More egregiously, in Adam’s view, is that Schwab will be allocating its clients assets into a high level of cash, which is where Schwab’s internal bank makes its real money. Nash says that these large cash positions that Schwab is building into its allocation will detract from the potential gains of young investors who, theoretically, have long time horizons and should be more heavily invested in stocks.

I’ll link to both Adam Nash’s original post at Medium below followed by the Schwab response – you can make your own decision. I side with Adam on this one – cash is cash, a portfolio is a portfolio. Both are essential for people, but ought not be conflated. Our own robo advisory, Liftoff, believes that investors should be invested and has its portfolios structured accordingly.

The real question is, if Schwab had no ability to earn money on its client cash balances, would it still be including allocations like these? Schwab makes the case that it would.

Sources:

Broken Values & Bottom Lines (Medium)

Response to Blog by Wealthfront CEO Adam Nash (Charles Schwab)

Shameless plug: We are thrilled with our new Liftoff service, check it out here! 

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  1. REVISITING ASSET ALLOCATION | Storm of Beta commented on Mar 11

    […] ” keep three to six months living expenses in cash on hand, but … anything beyond that is purely emotional or closet market-timing” (thereformedbroker.com) […]