A consistently high cash allocation may prove detrimental to investors’ retirement, according to the 2016 Legg Mason Global Investment Survey.

The survey of 500 affluent U.S. investors conducted from December to January found that the average asset allocation to cash in 2016 is 23%. This is a slight increase from the 2015 and 2014 surveys, in which 22% was the average cash allocation.

(Legg Mason defines an affluent investor as someone with a minimum of $200,000 in investable assets not including their home.)

“Certainly, having a 23% allocation to cash is almost the one strategy that guarantees you won’t achieve your objectives,” Tom Hoops, executive vice president at Legg Mason, told ThinkAdvisor.

Hoops pointed out that in the same survey investors reported that they expected a 7% average annual portfolio rate of return.

“This group has told us that they expect their portfolios to generate around 7% return every year,” he said. “But yet with a 23% allocation to cash, the math on how one gets to a path of 7% is very difficult. It would really require a 14%-15% return on their equity portfolio each and every year. And while that’s certainly possible on any given year, I think to count on that consistently year in and year out is difficult.”

If investors want to achieve this 7% rate-of-return objective, Hoops said “something has to be done” about their cash allocation.

“Moving away from [cash] into a set of investment outcomes and investment strategies and diversifying risk is, in almost every way, less risky than continuing with a very large cash position and a 7% portfolio objective,” he added.

First, one must ask why investors are consistently holding a significant portion of their assets in cash.

Hoops said many people often attribute this large cash allocation to investors’ fear.

“The consensus narrative is people are sitting on a lot of cash because they’re scared,” Hoops said. “They’re scarred from the great financial crisis, and so they’re hoarding this big cash position.”

Hoops thinks it’s something else rather than fear that’s keeping investors in cash: indecision. Investors are looking at two “difficult” choices, fixed income and equities, and as a result doing nothing, Hoops added.

“I think it’s less about fear, and more about the major issue facing older investors today. Which is, traditional fixed income doesn’t provide the income they need. And, they’re already fairly, fully invested in long-only equities and they don’t want to increase that volatility,” he told ThinkAdvisor.

The average age of those surveyed was 60 years old, and, as Hoops said, this is a cohort that needs income. Facing increasing longevity, this is a cohort that also still needs some growth and some total return in their portfolio.

According to Legg Mason’s study, investors have around 41%, on average, allocated to equities.

“I would theorize that they probably are reluctant to double down on their volatility in the equity space because they’re already at 41%,” Hoops said.

Meanwhile investors’ fixed income allocation has been falling for the past three years – from 20% in 2014, to 16% in 2015, to 15% today.

“They’re looking at traditional fixed income – and where government bond rates are, triple-A corporate bond rates and money market rates – and they know that that’s not going to get them where they need to go,” Hoops said. “They may be concerned about the risk of investing in low rates at a time when rates might rise.”

Rather than being indecisive and sitting in cash, investors should be looking at a range of investment strategies and asset classes, Hoops said.

“There’s an array – a continuum of strategies from those that are closer to fixed income, those that are more in the middle and those that are closer to equities – as ways to diversify portfolios particularly out of their cash position and give themselves a better opportunity to achieve their objectives.” Hoops said.

He gave three specific examples that investors could consider as cash alternatives. 1. Strategies that are closer to fixed income

“Rates and rate cycles and growth opportunities vary throughout the world, from country to country,” Hoops told ThinkAdvisor. “We know that, and you would think that this investor group knows that.”

However, the data from the Legg Mason survey finds that less than 10% of investors’ assets are invested outside of the U.S., which Hoops called “a shockingly low number.”

“I would start with expanding horizons within the fixed income portfolio, and looking at global bond portfolio, particularly global unconstrained portfolios where you can have managers that aren’t tied to a benchmark that can look for opportunities throughout regions, throughout sectors.”

2. Strategies that sit between fixed income and equities

These types of strategies, according to Hoops, produce income outside of a traditional fixed income portfolio or produce and generate some growth in ways that aren’t directly correlated to the equity market. Hoops suggested core commercial real estate and infrastructure.

“Both of these are real asset strategies that can produce consistent income but also offer some total return in a way that’s less correlated to the equity markets,” Hoops explained. “If you look at institutional portfolios, large institutions have a permanent and growing allocation to core real estate and infrastructure. And certainly higher net worth investors should be looking at both of those.”

3. Strategies that are closer to equity allocations

“Global equity portfolios is certainly a way to round out some exposure there,” Hoops said.

Hoops also suggested a range of strategies that provide some equity growth with lower volatility or less correlation to the equity market.

“Things like equity income, things like managed volatility strategies, hedged equity, absolute return, long-short equity, market neutral – all of which allow you to capture incremental income, position you for some incremental growth and do so in a way without doubling down on your existing allocations into traditional fixed income or traditional equities,” Hoops explained.

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