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A Different Degree of Wealth

How Cash Drag Pulls Down Your Portfolio Performance

Cash is an important part of any portfolio, providing liquidity and stability, but the amount an investor holds can significantly hamper long-term returns. This concept is known as cash drag, which occurs when a portfolio holds more cash than necessary, lowering the overall returns compared to benchmarks. While cash is useful for immediate needs and stability, excessive cash positions can significantly lessen long-term returns due to cash’s low yields compared to higher-returning assets like stocks and bonds.

The Problem with Excess Cash

The most apparent issue with holding excessive cash is that it doesn’t earn significant returns and can lose value over time due to inflation. For example, if invested in cash equivalents, cash offers zero returns, and when adjusted for inflation, it almost always results in a loss of purchasing power (negative returns). Over a long investment horizon, this can be detrimental to your portfolio’s growth. Even a small cash allocation can be a drag on returns, particularly for long-term investors who should be in higher-yielding assets like stocks.

Contrary to the belief that cash provides safety, bonds and money market funds can offer similar stability without reducing expected returns. High-quality bonds, like Treasury bonds, protect against inflation and tend to perform well when stocks are down, a phenomenon known as the “flight to quality.” Bonds also offer price appreciation potential, unlike cash, which remains stagnant. Meanwhile, money market funds pay interest comparable to bonds but don’t have the duration risk that can lead to price gains or losses. Both options are generally superior to cash holdings, but they can still be a drag on a portfolio if they are held in excess, especially if interest rates are low.

The Impact of Cash Drag on Portfolio Performance

Inflation is a critical factor eroding the value of cash over time. Consider an example: a $1 million all-cash portfolio with an annual inflation rate of 3%. After ten years, the purchasing power of this portfolio would be reduced to approximately $744,000 in today’s dollars, effectively losing over 25% of its value due to inflation.

In contrast, if that same $1 million were invested in a diversified stock portfolio with an average annual return of 7%, it could grow to approximately $1.97 million over the same period. This stark difference highlights the importance of minimizing excessive cash holdings to protect against inflation and maximize growth potential. By investing in higher-returning assets, investors can better preserve and grow their wealth over time.

To underscore the impact of cash drag, consider the historical performance of different asset classes. Over a 30-year period, a $10,000 investment in three-month Treasury bills grew to $21,351, whereas the same amount invested in the S&P 500 would have grown to $211,000. This stark contrast highlights the significant opportunity cost of holding excess cash.

Managing Cash Drag

  • Investing Excess Cash: To combat cash drag, investors should consider investing excess cash into higher-return opportunities. For example, instead of holding $10,000 in a savings account earning 0.5% interest annually, you could invest it in a diversified stock portfolio with an average annual return of 7%. Over ten years, the savings account would grow to approximately $10,511, while the stock portfolio could grow to about $19,672. This stark difference illustrates the importance of aligning surplus funds with your investment goals and risk tolerance. Diversifying into stocks, bonds, or even alternative assets like contemporary art, which has historically outperformed traditional markets, can significantly enhance returns.
  • Using a “Bucket” Approach: A practical strategy to manage cash allocations is the “bucket” approach. This involves dividing your funds into three buckets: an emergency fund for immediate needs (such as six months’ worth of living expenses), a savings fund for major upcoming expenses (like a down payment on a house), and minimal cash in long-term investment accounts. For example, if you have $100,000, you might allocate $20,000 to an emergency fund, $10,000 to a savings fund for planned expenses, and the remaining $70,000 into a diversified investment portfolio. This method ensures liquidity for short-term needs while maximizing growth potential for long-term goals.
  • Avoiding Market Timing: Market timing, or increasing cash holdings during market downturns, often results in underperformance. Staying invested through market fluctuations generally yields better results. For instance, if you had invested $10,000 in the S&P 500 in 1955, it would have grown to over $1.7 million by 2020, assuming an average annual return of about 10%. In contrast, the same amount held in cash or short-term Treasury bills, without engaging in any market timing, would have grown to only a fraction of that amount. This example underscores the importance of staying invested and avoiding the temptation to time the market.

 

Ideal Cash Strategy

Using a “bucket” approach, where funds are segmented into immediate, short-term, and long-term needs, helps manage liquidity and optimize returns by allocating longer-term cash needs into cash equivalents like bonds or money market funds that earn a return.

Cash Calculations

While cash is a necessary component of financial planning for emergencies and short-term needs, excessive cash holdings can lead to significant underperformance due to cash drag. By understanding the impact of cash drag and adopting strategies to minimize it, investors can enhance their portfolio returns and better achieve their long-term financial goals. Diversifying into higher-returning assets and employing efficient investment practices can help mitigate the negative effects of cash drag and optimize overall portfolio performance.

If you have any questions, give us a call, or read “Wealth on Purpose” by Bryan Ballentine.

Have a great weekend!




Sources: Located at the bottom of the article.


Golf Tip of the Week

Losing vs. Failing: Why every golfer needs to know the difference

Shane Lowry’s tie for sixth in the PGA Championship would be the crowning achievement of most pro golf careers. He finished 14 under, came within inches of the first 61 in major championship history and earned $639,440 in prize money.

What was interesting was how Lowry chose to assess his week on social media.

“I tried… I failed… and I’ll try again,” he wrote.

Tour players post this sort of thing all the time in the aftermath of a big week—a succinct recap of how it went, a nod to what is still to come and a thank you to the fans for their support. But one word in Lowry’s post stood out: After beating 151 of the best players in the world at Valhalla, did Shane Lowry really fail?

The absence of a clear answer underscores one of the trickiest dynamics in golf, professionally and beyond. Next week’s U.S. Open will feature 156 players and only one winner. To apply only the narrowest definition of success is to ensure widespread disappointment. And that’s just the height of the sport. Survey a parking lot full of golfers after a typical net tournament, or even a friendly match, and satisfaction is often in short supply.

All of this might lead to a familiar conclusion: Golf is hard, and misery is a given. If Shane Lowry can’t be happy after four rounds under par, there’s little hope for the rest of us. But that’s too simple. Because the real survival key to golf isn’t sidestepping failure. It’s learning to delineate between when you fail, and when you just lose.

This is the part of the story when friends and colleagues might start to roll their eyes. Seven years ago, I published a book called Win at Losing: How Our Biggest Setbacks Can Lead to Our Greatest Gains, that explores this very topic, and I’ve returned to it often since. The book examines notable setbacks across a broad spectrum of fields, golf included, and it also poses a central question about the difference between loss and failure. They are two words we tend to use interchangeably, but in doing so, we overlook an essential distinction.

“Losing is simply a fact. Failure is your interpretation of what happened,” Dr. Jim Loehr, a popular performance psychologist and author, clarified in the book. “Failure is almost always perceived as something you did wrong. It has a much more indicting component to it.”

Framing the two accordingly—a loss as a mere event in time, a failure as a commentary on performance—turns every golf round into a compelling case study, all of it dependent on context. By most objective measures—who he beat, the paycheck, how close he came to history—Lowry’s T-6 at the PGA was a tremendous week. But a closer look isn’t as rosy. Lowry began Sunday two shots off the lead and lost by seven. His final-round 70 was the second highest score among anyone in the top 10.

Every golfer assesses their performances on a different sliding scale. In Lowry’s case, with seven previous top-10s in majors, including a win in the 2019 Open Championship, he likely felt he failed to seize an opportunity (Lowry declined to respond to questions).

Predictably, Bryson DeChambeau was able to view his PGA Championship performance more favorably. He finished six strokes better than Lowry, and was on the driving range preparing for a playoff when Xander Schauffele made his clinching birdie putt on the 18th hole. By DeChambeau’s definition, the PGA was a mere loss.

“I gave it everything I had and made him earn it,” DeChambeau said. “There aren’t many shots I’d want to have back. I obviously wish I won. That stings. But I’m still proud of how I played.”

When would DeChambeau call a week a failure

“Failing is when you give up,” he said. “You quit, or you do something stupid that gives you no chance.”

The losing-versus-failure distinction isn’t about checking a specific box, but identifying what a golfer needs. The temptation is to say top golfers are paid so well, their motivation is implicit. But the higher the stakes, the more baggage you carry. Without validation in the form of a win, players tend to look for positive reinforcement elsewhere.

“Self-preservation as a professional golfer can be the No. 1 thing,” said the journeyman pro Joel Dahmen. “I think you always try to take something positive from every single week, whether you stuck to your routine or you ate healthy that week, or you chipped well. If you take the view that it’s never good enough, you’re going to have very, very few days in your golfing life that you get satisfaction from.”

A year ago, veteran tour pro Billy Horschel’s game had reached such depths, he shot 84 at the Memorial and broke into tears in a press conference afterwards. A resurgent 2024 is apparent in a win at Puntacana and a top-10 in the PGA. But to Horschel it might have been just as apparent walking off the 18th green on Sunday at last month’s Charles Schwab Challenge. For an otherwise ordinary 24th-place finish, Horschel remarked to his caddie Micah Fugitt he was oddly pleased. “It felt like a top-10 because of certain things I did well,” he said.

“When you first come out on tour, you sort of miss what the goal is of anybody, which is to get better on a daily basis,” Horschel said. “Sometimes those improvements are leaps and bounds. And sometimes they are little improvements. Yes, we are a results-oriented business. But the results don’t always show how much you’re improving.”

Horschel chose to view the Charles Schwab Challenge as a mere loss. But if you’re keeping score, the failures require attention, too. Even if the game is too difficult to obsess over every miscue or setback, it’s also important not to gloss over opportunities to learn. There are occasions when we can attribute a bad shot to an outside force—a cart in your backswing, a pebble on your putting line. If you do it all the time, you’re either the unluckiest golfer on Earth, or you’re only telling yourself what you want to hear.

“If you bend the truth, you’re not learning from it,” Dr. Jim Loehr said. “We have a tendency to tell ourselves stories to get us through the night, but the important part is to start with the truth, as harsh as it is.”

What’s weird about golf is how often even the truth changes, or at least a version of it. Consider: Last week in the RBC Canadian Open, one over par missed the cut. At next week’s U.S. Open at Pinehurst No. 2, it could be good enough to win. The existence of a shifting criteria is embodied by that quintessential U.S. Open phrase, “good bogey.” Again, loss versus failure: We will see both at Pinehurst, but one reason golfers will be generally more accepting of bad results is because that’s what they expect going in.

“Think about this. If you stood on a balcony and leaned over from the first floor, you wouldn’t have any stress. If you leaned over the balcony on the 100th floor, you’d have a lot of stress. You haven’t lost your ability to lean over and stand,” said the sports psychologist Bhrett McCabe. “Too many people look at competition as a dichotomous outcome. Unfortunately, they don’t see the complexity of challenges thrown their way and how they need to respond.”

A loss recognizes we’ve chosen to play an impossible game. A failure forces us to consider the ways we could still improve. Striking the right balance between the two is what keeps golf from beating us down altogether.




Tip adapted from golfdigest.comi


Recipe of the Week

Frozen Espresso Martini

2 Servings

Ingredients

Whipped Cream (Optional)

  • 1/2 c. heavy cream
  • 1 tsp. instant espresso powder
  • 1 Tbsp. Baileys
  • 1 Tbsp. confectioners’ sugar

Frozen Base

  • 12 oz. (1 1/2 c.) concentrated cold brew, frozen
  • 3 oz. vodka
  • 2 oz. Kahlúa
  • 1 1/2 oz. simple syrup
  • Espresso beans and instant espresso powder, for serving (optional)

Instructions

Whipped Cream (Optional)

  • In a medium bowl, using a handheld mixer on medium-high speed, beat cream and espresso powder until thickened. Fold in Baileys and confectioners’ sugar. Cover and refrigerate until ready to use.

Frozen Base

  • In a blender, blend frozen cold brew, vodka, Kahlúa, and simple syrup until smooth. Pour into 2 chilled coupe glasses.
  • Dollop with whipped topping (if using). Top with espresso beans and espresso powder (if using).

 

 

Recipe adapted from Delish.comii


Travel Tip of the Week

The Best Day and Time to Book Flights to Save Money

  

We’ve said it before and we’ll say it again — when it comes to booking flights, there is no magical day of the week or time of day that will guarantee you a good deal. But can you play the odds to increase your chance of finding a good deal? According to Expedia, yes. We dug through Expedia’s 2024 Air Travel Hacks report and spoke to Expedia travel expert Christie Hudson for some helpful tips for scoring cheap flights.

Best Day of the Week to Book Flights

The most important thing to understand when searching for cheap airfare is that airlines use dynamic pricing to set rates. That means a complex algorithm determines what the airfare should be based on real-time demand — and that means flight prices can change at any moment, often multiple times a day. That’s why there’s not technically one single day that’s the “best” day to book.

That said, there’s a bit of a caveat here. Even though you can’t predict when prices will drop, you can look at data to see which day of the week tends to have the lowest prices, which is exactly what Expedia has done in its Air Travel Hacks report. “Airfare pricing is incredibly dynamic. It used to be that Tuesdays were the best day to book, but after analyzing millions of bookings over the last two years, Sunday came out 13 percent cheaper,” says Hudson. “I’ve tested this theory dozens of times myself, and it tracks.” A recent study by Upgraded Points also found that the cheapest day to book can also vary by airline.

Now, that doesn’t mean that every flight will be cheaper if booked on a Sunday. That 13 percent figure is just an average — and it’s specifically for international flights. Domestic flights, on the other hand, are only 6 percent cheaper on average if booked on a Sunday. So is it worth taking a look at flights on a Sunday? Sure. But it’s also a good idea to monitor prices throughout the whole week, since you never know when prices might drop.

Best Time of Day to Book Flights

Now this is where you’re pretty much out of luck when it comes to gaming the system. Before airline revenue management systems were automated, there might’ve been a specific “drop time” when an airline would change fares. But given the dynamic pricing model, airfare can change at any moment. So there’s truly no reason to look for flights at a specific time of day. What you can do, however, is set price alerts for a flight, which will give you real-time notifications about price changes. Expedia’s alerts even use data to predict whether or not pricing will drop further.

Tips for Finding Cheap Flights 

Book your flight early.

More important than booking flights on a specific day of the week is booking flights during the “ideal booking window.” According to Expedia’s Air Travel Hacks report, international flights should be booked 60 days out and domestic flights should be booked 28 days out for the best savings. For international flights, that might save you around 10 percent compared to those who booked even earlier, and for domestic flights, that might save you 24 percent compared to those who book at the last minute.

Fly on a Thursday (or a Monday, or a Tuesday).

Another way to find cheap airfare is to choose your travel dates wisely. “The Air Travel Hacks report says Thursdays are generally the cheapest and Sundays are the most expensive day to start your trip. This can vary by season, however,” says Hudson. “Based on our Summer Travel Outlook, which analyzed bookings from summer 2023, during the summer months people who departed on Monday (international flights) or Tuesday (domestic flights) saved around 15 percent compared to those that departed on Thursday and Friday.” Consider looking at a flight price calendar to see if bumping your trip up or back a few days might net you a big savings on airfare. Just remember that you might lose out by paying more for accommodations.

Track flight prices after you book a flight.

This is perhaps the best hack of them all. After you book a flight, continue to monitor your specific flight’s prices. If the airfare drops, you can rebook your flight and pocket the difference in airfare as an airline e-credit. Or you could automate the process and potentially snag a genuine refund. “Expedia’s Price Drop Protection is my secret weapon when it comes to booking airfare. You can add it onto your flight booking and get an automatic refund if the flight fare decreases on Expedia after you’ve booked,” says Hudson. “To date, I’ve gotten back hundreds of dollars. There’s a nominal fee for Price Drop Protection, unless you’re a Gold or Platinum One Key member booking on the app.”

Don’t be fooled by basic economy fares.

Yes, basic economy is the cheapest fare class, but it’s highly restrictive. You won’t be able to choose your seat in advance, nor will you be able to change or cancel your flight. But beyond that, one of the biggest downsides to basic economy is that you have to pay for additional services. “It may be cheaper initially, but once you’ve added in seat selection or baggage fees, the savings might not be as significant,” says Hudson. Definitely do the math before booking basic economy (or, as we’d suggest, just avoid booking basic economy altogether.)




Tip adapted from travelandleisure.comiii 


Copyright (C) 2021.  Ballentine Capital Advisors.  All rights reserved.

Our mailing address is:  

Ballentine Capital Advisors
15 Halton Green Way
Greenville, SC 29607

Sources:

Cash Drag: Definition & Portfolio Impacts

Yes, You Can Have Too Much Cash

Can You Hold Too Much Cash? Know the Pros and Cons

4 ways cash drags down investors’ portfolios

Disclosure:

Ballentine Capital Advisors is a registered investment adviser. The advisory services of Ballentine Capital Advisors are not made available in any jurisdiction in which Ballentine Capital Advisors is not registered or is otherwise exempt from registration.

Please review Ballentine Capital Advisors Disclosure Brochure for a complete explanation of fees. Investing involves risks. Investments are not guaranteed and may lose value.

This material is prepared by Ballentine Capital Advisors for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation or any particular security, strategy, or investment product.

No representation is being made that any account will or is likely to achieve future profits or losses similar to those shown. You should not assume that investment decisions we make in the future will be profitable or equal the investment performance of the past. Past performance does not indicate future results.

Advisory services through Ballentine Capital Advisors, Inc.

i https://www.golfdigest.com/story/low-net-losing-failing
ii https://www.delish.com/cooking/recipe-ideas/a60527289/frozen-espresso-martini-recipe/
iii https://www.travelandleisure.com/travel-tips/best-time-of-day-to-book-flights

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