Executive Summary
Normally bonds play the protective role in portfolios. Given today’s low rate world and the potential for rate rises, bonds are not well-suited to do so at the moment. Most investors also prize cash1 for its defensive properties, recognizing cash as a liquid and stable store of value. Meaningful cash allocations, however, are frowned upon given cash’s low returns, which lead to “cash drag” over long periods. With interest rates near record lows, the distaste for cash is as intense as ever. This view, though, overlooks the fact that cash provides critical optionality to patient investors, allowing them to play offense when assets are priced attractively. Risky assets and long-duration bonds are priced to deliver underwhelming returns based on GMO’s forecasts, making cash more important than usual.
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