Have Cash Set For Next Dip

Sat., March 1, 1997

Bill Barnhart Chicago Tribune

Investors in stock mutual funds, whether they know it or not, are being handed more responsibilities as well as more choices.

In addition to selecting from a mind-numbing array of stocks, investors building their nest egg in stock funds should now be considering how much to accumulate in ready cash, because the odds are their fund managers aren’t doing it for them.

Numerous studies have shown that the essential decision for long-term investing, in terms of achieving the best total return at acceptable risk, is not which stocks or stock mutual funds to buy or sell, but how to allocate your money among the three basic categories of financial assets: stocks, bonds and cash.

The allocation depends on such factors as an investor’s risk tolerance and the investment time horizon.

To many investors, cash means a money-market mutual fund, which invests in short-term debt securities and often has check-writing.

For several weeks, professional market strategists at many investment firms have recommended a greater portion of cash in their model portfolios. This adjustment reflects not only anxiety about overexposure to stocks and bonds at the current market levels but also a desire to build cash reserves for buying on the next market dip.

Flows into mutual funds in January reflected the caution. Despite bullish conditions in the stock market, $32 billion flowed into money-market mutual funds, one-third more than the $24 billion that went into equity mutual funds and more than 10 times the $3 billion invested in bond funds.

You can’t count on the manager of your stock mutual fund to keep cash on hand as a safety net and opportunity cushion. In fact, the level of cash in equity mutual funds has never been lower, as equity managers struggle to outperform market benchmarks. Increasing numbers of investors in equity mutual funds apparently prefer things that way, says Peter Crane, managing editor of IBC’s Money Fund Report in Ashland, Mass.

“I can’t say that investors have been moving from the stock market into cash, but the level of cash in stock funds is at a historic low and it appears that investors are doing their own asset allocation” into money funds, he said.

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