[MUSIC] How much cash do you hold in your portfolio? Hello. My name is Dirk Effenberger. I'm heading the Cross-Regional Investment Office at the Chief Investment Office of UBS Wealth Management. Getting back to our question, actually, private investors hold a significant amount of cash. According to OSCD statistics and you'll see this on the chart, private households in the U.S. allocate around 23% of their financial assets to cash and related instruments. This share is even higher in other regions, for example, in Europe reaching around 40% in Germany and more than 40% in Spain. So obviously, cash plays a very important role in private investors' asset allocation. This is why I will like to tackle three questions with you. First of all, how do we define cash, what is cash? Secondly, what are the reasons for hoarding cash? And thirdly, is cash really safe? Or, to put it into more common language, is cash always king? And let's get started with the first question. What is cash all about? So, cash is much more than just pocket money like notes and coins. It also comprises investments, which are typically characterized by a number of factors. First of all, high degree of liquidity, which means daily availability of your capital. Secondly, low risk, which usually means low volatility or capital protection at maturity. And a third factor, which is important in defining cash investments, is that there is a maturity of up to 12 months of the underlying asset. So these characteristics apply to pocket money. But also to saving accounts, fixed term deposits, money market funds, and many more cash investment solutions. Typically cash is a low yielding, low risk investment compared to equities and bonds, and you see this on Figure 2. You see here that since 1997, cash has generated the lowest return, but also has shown the lowest volatility of the selected asset classes, equities and credit in particular. In general, cash return is determined by money market interest rates and has by central bank policy. Consequently, the return of cash right now in most developed markets, it's close to zero. And this leads me to the next question, why should I actually hoard cash if the return is close to zero? First of all, there is consumption of cash. So, you want to pay your bills. Secondly, there's so called iron reserve. This is held to cover unforeseen and unexpected expenditures due to illness or an accident for example. The iron reserve can remain untouched for years because an active event never occurs. But it allows the investors to sleep well. The iron reserve can actually be regarded as a type of insurance substitute. The third reason why private households hold cash is for asset portfolio purposes. For example, if the investor expects lower prices going forward, then the investor prefers to hold money to purchase financial assets at a later date and at a lower price. In this sense, there's clearly a tactical argument for holding cash in a portfolio. However, holding cash because of negative view on other asset classes is not straightforward. Since it contains timing risk because you don't know when other assets classes outperform, and potentially, high opportunity costs should other asset classes perform better than you expect and better than cash. And this is something other asset classes usually do in the long run. Overall, it becomes very clear that there's no specific cash portion which is optimal for all investors at the same time. However, taking all the above into account, many private investors tend to hold more cash than they actually need. And admittedly, this is probably true for my own portfolio. Thus, many investors tend to support excess liquidity, which for portfolio reasons, might be better invested somewhere else. In fact and this is an important point, I think, holding too much cash can be risky for private investors. And to answer our third question from the beginning, no, cash is not king at every point in time. There are a number of reasons for this. First of all, opportunity costs, holding cash comes at a price. Cash acts as a drag on long term portfolio returns. For example, we estimate that over the next five to seven years, cash will return only around 0.5% in the Eurozone and literally nothing in Switzerland. Secondly, portfolio risk. It can be shown that adding too much cash to your portfolio can increase portfolio risk and lead to higher losses during times of stress which is pretty counterintuitive. Historically, bonds and equities diversify one another better than cash. A third reason, inflation, and that's very important. Let's assume you have been holding one units of pocket money since 1995. Taking into account the accumulated inflation since then in real terms, you would have lost 10% of your capital in Switzerland, 25% of your capital in Germany, and one-third of your capital in the US and the UK. For emerging markets, the loss in real value of your pocket money would be even higher. This argument means that inflation eats into the real value of your cash. And that in real terms, you actually lose capital over time. To sum up, cash is more than just coins and notes, it also includes money market related instruments. Secondly, there are concrete reasons for holding cash. And when trying to assess your individual optimal level of cash holding, you should have a good understanding of your personal consumption needs and your iron reserve requirements. Finally, be aware of portfolio considerations. Last, but not least, no, cash is not safe at every point in time due to a potentially high opportunity cost, potentially due to portfolio considerations, and due to inflation, which reduces the real value of your accumulated capital. As a result, holding too much cash can actually hinder achieving your financial goals. Thank you for watching and enjoy the rest of the program. [MUSIC]