With rising cash yields, advisors are struggling to keep some clients in stocks.

In the immediate aftermath of the worst year for balanced portfolios since 2008 and the worst year for bonds, as well as a looming recession, investors are once again weighing their cash allocation options.

Despite wide-ranging bullish forecasts for 2023 that point to a slowdown in inflation and likely another hike in interest rates, the reality of economic uncertainty, coupled with money market yields reaching 4% at some online banks, has made cash a tempting alternative to risky assets. .

“The chaos of the past 12 months has clients wondering if they should move to cash or more conservative investments,” said Eric Amzalag, founder of Peak Financial Planning.

Amzalag said growing recession talk has not helped his efforts to get clients to focus on long-term investment goals.

“In response to the chaos of the past 12 months, I’ve taken a more proactive stance in managing client accounts,” he said, “with a more active collection of profits from winning client positions and periodically redistributing it to opportunities that got cheaper over the past 12 months.”

Amzalag is also pursuing a more conservative distribution strategy that is “positioned heavily in cash and short-term US government bonds.”

“We have a very low equity weight and plan to reallocate profits from our long-term bond positions to equities as bonds rise in value and stocks fall,” he said.

For Dennis Nolte, vice president of Seacoast Investment Services, cash hoarding is nothing new for 2023.

“For most of the last two quarters, we were between 35% and 50% cash,” he said. “Clients are absolutely not investing new capital in stocks or bonds, but they are certainly paying attention to what happens to their money.”

Nolte cited clients who recently asked about getting a 5% yield on a 15-month CD or only wanted to invest in short-term Treasuries.

“People are making bargains with their money and don’t feel the need to increase risk right now,” he said. “We agree with them.”

But even as cash ended 2022 as the second-best-performing asset class behind commodities, some advisors are resisting the temptation to seek safe haven.

“It makes sense for clients to hold cash for expected expenses over the next few years, given how close money market rates are to short-term bonds,” said Seth Mullikin, founder of Lattice Financial. “However, it doesn’t make sense to hold cash for the purpose of timing the market.”

Nicole Wierick, founder of Prosperity Wealth Strategies, doesn’t believe the money-rush instinct and the philosophy that investors “have to do something to fix things.”

“It’s our human nature to want to solve problems, however this basic human inclination can be destructive when it comes to investing,” she said. “I use this opportunity to pause and remind clients that volatility is a normal and expected part of investing. Then I will refocus the conversation on long-term goals and show how short-term, emotion-driven reactions to the market can derail a disciplined long-term plan.”

Nate Creviston, a portfolio analyst at Capital Advisors, is trying to get clients to look forward rather than backward, but watch out for money management opportunities if that’s the only place clients feel comfortable in that market.

“Our clients are not moving to cash; if anything, now could be a good time to buy stocks,” he said, citing a history of strong stock market recovery. “Returns after a 25% market correction average 27% after one year, 45% after three years, 93% after five years, and 238% after 10 years.”

Of course, for those clients with shorter time horizons or who simply can’t handle the current market volatility, Creviston said he will fund Treasury bills.

“If the client is set to move to cash, we will currently buy Treasury bills with a yield of 4.3% to 4.5% with maturities of two to three months,” he said. “That’s a much higher return than you’d find in a traditional bank account or most high-yielding savings accounts online.”

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