Guest Contributor, Lauren Pearson of Hightower
We are so happy to share a blog this month from Lauren Pearson of Hightower Somerset Advisory, a Birmingham-based investment advisory and wealth management firm. In this piece, she shares her thoughts on using cash as an important component of your wealth management strategy, particularly in the current global financial climate. We appreciate Lauren sharing her ideas and hope that you find them interesting and insightful as you plan your financial strategy this year. Thank you, Lauren!
Cash, Not a Neutral Option
We often think of cash as merely a safe harbor for our wealth, or as a neutral option. But it’s really not. Holding cash is an investment and an intentional planning decision. One that has risks and costs that may not be immediately transparent.
So far this year, the United States dollar (USD) is down 4% against the Euro, and over the trailing 12 months, it is down 6% against the Euro.
What does this mean?
This means that the for the same amount of material goods, the USD buys less today than it did a year ago relative to the Euro.
Therefore, it now costs more cash for companies in the United States to import materials from overseas. As their supply costs rise, these companies see declining profits. To offset this, they will raise their prices to some degree. We see this increase in the cost of goods and services as consumers and call it “inflation.”
One way to protect yourself from the volatility or weakening of the US dollar is simply not to hold as many dollars. By holding fewer dollars, you are helping to keep yourself from being as exposed to the costs and risks of the dollar dropping in value.
To be clear, at Somerset, we do not consider the US dollar to be a best-case investment. We view it as short-term investment, with carrying costs and risks that are opaque (inflation). It has a very specific purpose – providing for spending needs. You cannot easily pay for your groceries with Apple stock. You need cash.
Therefore, we recommend all clients have enough in cash to meet their spending needs for the next 12 months or perhaps a little longer, if desired.
If you do not want the up-and-down journey of the stock market to impact you as much (for any number of reasons) we would much rather see – and do advise – a portfolio designed to reduce volatility in ways other than overly relying on cash.
Now, having made a decision to limit your direct cash exposure, the changing value of the US dollar is still a relevant fact. Imports to the United States still cost more cash than they did a year ago, which means that profit margins are going to be less for companies that rely on imports for services or goods. Yes, some of those increased supply costs will be passed on to consumers, but not 100% of them.
Knowing this, a further way to protect yourself from fluctuations or declines in the USD is by investing in companies with a global footprint. These companies’ US operations face increase supply costs, but their overseas operations see decreasing costs as their currency rises in strength. Global companies of a certain size and market presence help to insulate you from the consequences of a fall in the value of the USD.
The United States dollar is still very, very strong. But it is worth remembering that it is not just a neutral option. It carries risks just like any investment (or currency).