Many fund managers are doing this right now - should you follow?
A glance at the financial news headlines reveals an increasing trend of late: many professional portfolio managers are adopting more defensive positions and increasing the cash levels in their portfolios. Indeed, according to a recent article from Investment Week, some portfolio managers are holding as much as 20% of their portfolios in cash at present.
So why are the professionals moving to cash and more importantly, should you follow?
Market highs, investor complacency
Looking at the strong recent performances of many key global stock market indices, it doesn't surprise me that plenty of fund managers are cautious right now. For example, in the US, both the S&P 500 index and the NASDAQ have rallied to new all-time highs in the last few days, with investors piling into popular stocks such as Facebook Inc, Alphabet Inc and Amazon.com Inc. Here in the UK, the FTSE 100 has surged over 35% since its low early last year and is less than 2% below its all-time high set in early June.
It's the general level of complacency among investors right now that clearly worries some fund portfolio managers.
Despite Brexit, Trump and talk of interest rate rises, the markets seem incredibly quiet at present. For example, the 'short' interest on the S&P 500 index - those betting on the market to fall, is at its lowest level since the Global Financial Crisis (GFC). And the CBOE Volatility Index (VIX), aka the 'fear index,' is trading at a level below 10, suggesting the stock market is enjoying a level of calmness not seen since 1993. This most likely means that it won't take much for market volatility to return.
Is cash king then?
So should private investors follow the professionals and move into cash? In my view, retaining a little bit of cash on the sidelines right now is probably quite a sensible option. That's because, while cash is no doubt a poor investment over the long term, it does provide the investor with valuable options when opportunities arise.
Think back to the volatility that arose after the Brexit vote last year. Investors were hitting the panic button and dumping domestically-exposed companies without paying much attention to the long-term prospects of such companies.
Lloyds Banking Group shares could be picked up for under 50p. Legal & General Group shares were trading around 165p. In short, there were many bargains available for the investor with cash on the sidelines.
While we may not see that level of panic in the near future, it would not surprise me at all if markets do undergo a correction at some stage later in the year. Indeed, Bank of America analyst Michael Hartness said this week: "The most dangerous moment for markets will be when rising rates combine in three or four months' time with an inflection point in corporate profits."
So in my view, it's worth approaching the markets with an element of caution right now, and having a little bit of cash on the sidelines could be a good insurance policy. Enthusiasm for stocks is high, but as long-term investors it's important to keep Warren Buffett's advice in mind: "Be fearful when others are greedy and greedy when others are fearful."
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Edward Sheldon owns shares in Legal & General Group. The Motley Fool UK owns shares of and has recommended Alphabet (A shares), Amazon, and Facebook. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.