It may be a good strategy to keep some cash as part of a well-balanced investment portfolio, for planned and unplanned expenses, or to take advantage of investment opportunities that may arise, especially in a rising interest rate environment. When market prices go down, investors with cash have the opportunity to sweep up normally expensive assets at bargain prices.

It is also considered a good strategy for companies to keep cash. Having cash on their balance sheets allows them to be more flexible in managing their business and their obligations. A significant level of cash also allows businesses to weather economic downturns when people are in savings mode and demand for a business’s products or service may be low or non-existent, as many business operators learned the hard way, thanks to the current pandemic. The higher the level of cash, the easier a business will be able to pay its operating expenses and debt obligations even if revenues are low.

Amassing a proper cash reserve can bring flexibility to your finances for both retail and corporate investors but oversaturating your account with too much cash can hold your finances back, especially if it is left sitting idle in a bank account, as the returns are less than inflation. So, what should you do?

Rather than hold funds as actual “cash”, investors can invest in instruments that can easily and quickly be converted to cash — in other words, “liquid” investments. Liquid investments are usually viewed as being the same as cash, as their value remains largely the same when sold. Several factors must be present for an asset to be considered liquid: It must be traded/available in an established market, with a large number of interested buyers, and have the ability for ownership to be transferred easily.

While liquid investments can be easily sold for cash and have a stable market price, non-liquid assets cannot be quickly sold for cash and prices can be much more volatile. Land and real estate investments are examples of non-liquid assets because it can take months for a person or company to receive cash from the sale.

A common and popular liquid investment is a repurchase agreement, also known as a “repo”. Classified as a money-market instrument, a repurchase agreement functions in effect as a short-term, collateral-backed, interest-bearing loan. The investor acts as a short-term lender, while the seller acts as a short-term borrower. The securities being sold act as the collateral. Repos (usually) offer the investor better rates than a bank account and can be easily “encashed” or sold by the investor. Therefore, the goals of both parties — secured funding and liquidity — are met.

Cash usually struggles to keep up with inflation, so it is better to invest your cash rather than leaving it idle in a bank account. If you know or think you may need the cash soon, stick to liquid investments.

Toni-Ann Neita-Elliott, CFP is the vice-president, sales & marketing at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm

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