(PUB) Investing 2015

In mid-July,

Fidelity Municipal Income 2015

FMLCX

will liquidate, leaving shareholders with a chunk

of new cash to invest or spend. As one of the few

holders of the fund, that meant my cash holdings

will grow by a fair margin. But I’m not in a rush to

reinvest. Years of low interest rates mean there are

few bargains out there. If that fund had not matured,

I could have built cash from dividends and other

forms of income. Simply refraining from reinvesting

dividends and capital gains, especially in taxable

accounts, is a fine way to build cash.

When you are building a cash stake, financial

planners typically recommend something like six to

months’ worth of living expenses so that you are

prepared for emergencies like job loss, costly home

repairs, or medical bills. For retirees, that recommen-

dation typically goes to one to two years of living

expenses. But it can also be useful to hold a little

more than that in your investment portfolio. At times

like this,

10%

in cash is not a bad idea.

Beyond that, I wouldn’t go to more than

10%

in cash,

because there’s a big opportunity cost to missing out

on market appreciation. So, in today’s environment,

I’ll just hold some cash so that I’m ready for a sell-off.

Such a sell-off could come in high-yield, where the

market has come under renewed pressure because

of commodity weakness, outflows from junk-bond

funds, and rising rates. It could come in Europe,

where the situation is Greece is growing increasingly

ugly. (On the plus side, financial markets have had

years to prepare for this scenario, and that usually

limits the damage done.) There is already quite a sell-

off under way in China, though stocks don’t yet look

cheap. If my cash pile grows by any more than it has,

I’ll probably put it to work in those areas and then

go back to investing across core areas. I’m continuing

to contribute to my

401

(k) every paycheck, too. So I’m

not on strike. Stocks seem pricey to me, but I’ve

seen too many people get dogmatic about something

that’s far too hard to predict. In the investment

world, it seems like the folks who predicted the last

bear market keep trying to predict new ones, and

they keep being wrong. Meredith Whitney and John

Hussman are among those who have more than

given back their bear-market outperformance by

seeing disaster around every corner.

This leads to a more general principle, which is that

everyone needs to have some sort of asset-allocation

blueprint, and market shifts should only lead to

changes at the margins of your portfolio. You don’t

want to veer off your carefully designed course

no matter the environment. Investors who held the

course after

2008

recouped their losses in a few

years, but those who panicked are still trying to

make it back.

When Not to Raise Cash

That’s not to suggest raising cash is for everyone. For

instance, a relatively young investor should only have

the emergency cash and nothing more because the

opportunity cost of a lifetime of compounding is enor-

mous. In addition, a market setback is going to sting

less given the long time in which to recoup losses.

If I held a lot in short-term bonds, as I did recently in

the form of Fidelity Municipal Income

2015

, I would

also hesitate to raise additional cash. You don’t want

too much of your portfolio tied up in very low-

returning investments. While short-term bonds and

short-term bond funds are not perfect cash substi-

tutes, they are pretty similar in risk and yield.

Finally, I would show some restraint if I expected a lot

more cash to be coming through the door in the

form of a bonus or sale proceeds from investments or

housing. In that case, your challenge is keeping

cash from getting too large.

Cash Is Not Trash

The Contrarian

Russel Kinnel

Our Contrarian Approach

I go against the grain to

find overlooked funds that may

be ready to rally.