Investment guru Mohamed El-Erian calls cash the best way to navigate what is turning out to be a volatile year for investors. He points out that cash is the “the most underappreciated asset,” but that’s what’s needed now.
“If you go to an investment adviser they’ll tell you cash is wasted,” says El-Erian, chief economic adviser at Allianz. “I don’t think so.”
How much cash? He advises holding 25% to 30% of your wealth in cash.
“You will have many opportunities to buy really good names at beaten down prices,” says El-Erian, whose latest book “The Only Game in Town” was released this week..
It has been a brutal start to the year for stock investors. The Standard and Poor’s 500 has lost almost 8% this year, and the Nasdaq has fared even worse. Fear is spreading, but so is opportunity.
Why opportunity?
“The response to a lot of volatility is to sell across the board. And when you sell across the board, you throw out everything at the same time,” he says.
“Don’t underestimate the power of having cash, because it gives you agility. It also gives you resilience.”
Ironically, the very cash hoarding behavior he recommends for average investors, is what CEOs have been doing for some time.
It’s already reflected on corporate balance sheets. CEOs are holding on to their cash, spending it on defensive mergers and acquisitions or giving it back to shareholders with share repurchases rather than risking it.
El-Erian says that people need to learn from corporate America: “The big gap between Main Street and Wall Street is that what’s happening continues to benefit the financial sector, but it’s not benefiting Main Street, and that’s got to change.”
