Diversification: The Value of Cash

Source: Goldman Sachs

With interest rates being negative for most of the bonds traded and issued around the world, the opportunity cost of cash is very high. But it’s probably the most valuable yet contrarian asset to own to help diversify risk in a portfolio.

And it’s not just a bunch of value investor veterans flying the idea around. It’s in a presentation deck shared with clients by Goldman Sachs.

The deck actually has limited explanations attached to it, but the title and data in the above table are self explanatory.

James Montier, one of the most famous value investors, wrote a major piece on why holding cash in an diversified portfolio… back in 2011.

« If one is worried about systemic illiquidity events or drawdown risks, then what better way to help than keeping some dry powder in the form of cash – the most liquid of all assets », he wrote in his article.

One of the points of Montier’s piece was to show that « tail risk protection » strategies rarely reach their objective, while cash is probably the cheapest, easiest and yet the most effective way to diversify drawndown risk, without actually losing much of the market performance.

But as usual, this is really effective is you have a solid analytical framework that can tell the difference between price and value.