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The Downside of Cash/Is Infrastructure the Latest Investing Trend?

Posted by admin on July 5, 2007 in Investment Strategy

I wanted to follow up on two previous posts and add some thoughts and update you on a few items. My post on “The Most Over-Looked Part of Your Portfolio is…cash” was most popular post yet given the number of responses I got. Thanks to everyone for reading and contributing. I ended up having an unrelated conversation with a friend about how much money we needed in our bank account to be comfortable (I need 2 months of fixed expenses in my chequing account to feel comfortable; otherwise, I am out of my comfortable zone despite the fact I have a line of credit which would cover me. I am operating the finance company in the same manner- there must be at least 4-6% of assets under management in cash); there is a real positive psychological effect of having money in your portfolio.

One other comments- remember that the interest you make on cash is not tax efficient; you are being taxed 100 cents on the dollar as opposed to the tax efficiencies of dividend payments and capital gains. If your portfolio is quite modest, this will have a limited tax effect- you are most likely not going to make enough interest to push you into another tax bracket (but please check just to be sure). If your portfolio is quite large, this could be problematic; the longer you keep a lot of cash around in a high-interest account outside of your registered retirement account (anything over 20% of your portfolio for long period of times), the more likely you will push yourself into another tax bracket. Like all successful stock traders, at some point, cash has to be deployed to invest in quality holdings so maintaining cash for cash’s sake for a long period of time is not going to serve you well in the long term.

As a follow-up to a previous post, there continues to be a movement towards buying infrastructure as the next investment trend. Most Jim Cramer fans probably knows that the Mad Money host mused that Brookfield Asset Management Inc. (BAM on both NYSE and TSX) may be the next Berkshire Hathaway and BAM’s CEO as “Buffet-esque.” BAM owns and manages infrastructure; a steady, stable and cash flow rich play. BAM is, in and of itself, a great case study on how not to build a business (when it was known as Brascan) and how to build one. Last week, it was reported that RBC, traditionally a leader in Canadian banking, has invested heavily in the infrastructure business. Infrastructure is traditionally a difficult industry to buy into for investor, there are some ideas listed in my previous post linked above. As usual, please conduct your own due diligence before investing.