(By Patrick Larkin) The All-Cap Value model entered December with a cash position equal to almost 40% of the portfolio's total value. This large cash holding was a consequence of my inability to find suitable new investments in recent months to replace positions that I've recently exited.
I generally don't like cash as long-term holding. When it became clear on the last trading day of 2012 that Congress was going to pass a Fiscal Cliff deal that again defers hard choices about the nation's debt problem, I moved out of cash and into the Vanguard Total Stock Market Index Fund (VTI). VTI is essentially a proxy for the broad U.S. stock market.
[Related -In A World Of Artificial Liquidity – Cash Is King]
My focus is on investing in high quality businesses that I understand when their stocks are cheap. The portfolio has the potential to be highly concentrated, as I will typically invest between 5% and 20% of the portfolio in a new holding.
Despite that, at times it still isn't possible to identify enough cheap, high quality businesses to fill out the portfolio. One alternative in that situation is to hold cash, and I am comfortable holding some cash for limited periods as I search for new opportunities.
However, unless the market is grossly overvalued, I believe that a low-cost, broadly diversified index fund such as VTI is preferable to cash as a "placeholder" within a portfolio of risky assets such as the All-Cap Value Portfolio.
To be clear, everyone needs to hold a reasonable amount of cash in his broad personal portfolio to meet both expected and unexpected short-term liquidity needs. But beyond that, there are almost always better alternatives for long-term investment than cash.
[Related -Did The IMF Provide Support To Syriza?]
An ill-considered purchase of an overvalued, risky individual stock is not one of those alternatives, but in my view VTI and similar broad index funds currently are.
The investments discussed are held in client accounts as of December 31. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
Certain information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The manager believes that such statements, information and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.