When Your Advisor’s Idea for Cash Isn’t Cash

Wall Street is always conjuring new products for investors to consider. Typically, these products claim a unique way to capitalize on some vogue investment trend, and investors are told the product will offer spectacular returns when compared to “run of the mill” investments like stocks, bonds, or cash. But in our opinion, the only certainty you’ll find with these products is that the person selling them to you will earn handsome fees.

In the run to the Great Recession of 2008/2009, Wall Street created a host of products that allowed investors to bet on the bull market for real estate. Enormous fees were generated underwriting products that leveraged mortgage cash flows, property values, and rents. When the music ended, however, many of these products were worthless; almost all investors suffered losses.

Having been around the market for several decades, we’ve seen a number of cycles culminating in a slew of esoteric Wall Street products—products we’ve seldom seen as appropriate for individual investors because they are, in our opinion, both unnecessary and expensive. 

 We believe individual investors will do better over the long run owning common stocks, bonds and cash in their portfolio. We believe they should ignore advisors or brokers who pitch them bundled products created by Wall Street. The cost and risk are just not worth the potential returns.

You have to be careful though, Wall Street can be very sneaky with their products.

Take for instance, cash. Seemingly the most benign of investments, how could Wall Street screw up cash with unnecessary financial engineering?

Well, they have.

Over the last decade, several mutual funds were created with the purpose of increasing cash returns for investors with no incremental risk. These funds are known as short or ultra-short income funds.

They are not cash but sold as if they are. Morningstar tracks these funds under the ultra-short bond category and state that these funds are products for investors to diversify their cash holdings.

Say what? Name me the financial textbook that says an investor should diversify their cash holdings.

Well, I suppose in some cases diversifying cash makes sense. For example, if your cash holdings exceed bank insurance protection then of course you should open multiple accounts. That’s being prudent.

What’s the purpose, aside for creating fees for Wall Street, of cash alternative investments like the entire ultra-short bond fund category?

Your advisor recommending such fund will likely say owning an ultra-short bond product will give you a higher return with the safety of cash. In other words, your principal is secure, and you’ll actually make a little more money.

That sounds enticing. No wonder Wall Street has sold billions of these types of funds. Unfortunately, ultrashort bond funds are not cash. We repeat: they are not cash. There is a risk of loss that simply does not happen when you truly own cash.

One example of these ultrashort bond funds marketed by big Wall Street firms is the Pioneer Multi-Asset Ultrashort Income Fund (NASDAQ: MCFRX). The promise for this cash alternative is a yield of approximately 2% per annum.

That sounds great, I suppose, but not when there is a chance I might lose money owning the fund and guess what? That just happened.

During the market volatility caused by the Coronavirus crisis in February and March, the Pioneer Ultrashort Income Fund dropped by nearly 10%. Cash does not fall 10%!

As of the close on June 16, investors are still down nearly $0.40 per share on this cash alternative investment.

Please keep in mind the risks whenever you are being sold a product purported to be a better way to invest in a market. If you look at it carefully, you may find risks not worth taking and costs far in excess of what other products offer. Better yet! Stick with investments in stocks, bonds, and cash, in the long run you’ll be just fine!

To learn more about Nicollet Investment Management, give us a call.

Please click here for important disclosures.

Guest User