Cash can minimise 'market shock' risk

By Killian Plastow

— 1 minute read

18 August 2016

The higher likelihood of market shocks in the current environment makes it worthwhile holding extra cash, says IOOF.

IOOF portfolio manager for fixed interest and cash Juanita Escobar said markets are increasingly susceptible to ‘grey swan’ events, which can be “anticipated to a certain degree, while still having a sizeable impact on the valuation of a security”.

Ms Escobar said cash holdings are a pragmatic way to manage risk associated with these events even in the face of low cash rates.

“Increasing cash holdings at current interest rates may be not too expensive as a capital preservation principle.

“Cash investments can also be considered a great risk management tool as they provide flexibility when superior risk-reward investments opportunities arise,” Ms Escobar said.

Furthermore, Ms Escobar pointed out that while many Australian investors are likely to see current bond yields and cash rates as “too expensive” when contrasted with historical levels, they are still “very attractive” when compared with many other global economies where negative rates are prevalent.

“Cash contributes to the portfolio construction and asset diversification and neutralises the negative performance of other assets, even more so, when more grey swans are expected,” she added.

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