Performance figures for each account are calculated using time weighted rate of returns on a daily basis. The Composite returns are calculated based on the asset-weighted monthly composite constituents based on beginning of month asset mix and include the reinvestment of all earnings as of the payment date. Composite returns are as follows:

Cash may be king, but cash flow rules in times of volatility

View the original online.

Cash-flow-producing assets can be one of the most powerful tools available for boosting investor returns in the long run

As the capital markets continue their downward slide, many investors are wondering exactly when we might hit rock bottom and begin the recovery.

Given the current landscape, it might be expected that questions about market recovery are something I get asked a lot by clients. But that is not the case. My fellow wealth advisers and I don’t hear this query often because of the specific approach we take to structuring client portfolios.

The old saying “cash is king” will always remain true, but during volatile times I prefer the expression “cash flow is king.” The best way to prepare for bear markets is before they start. Part of the way we do this is by focusing on cash-flow-producing assets. That is, investing in companies we believe will pay sustainable and preferably growing dividends.

The benefits of investing in cash-flow-producing assets are readily apparent to us, especially in the current economic environment. This is because the cash generated from an investment, even one that has been declining in value, can be redeployed to buy more of another asset at a possibly discounted price, thereby potentially increasing the future value and cash distributions of an overall portfolio.

Before conversations begin around how to redeploy cash distributions within a portfolio, an investor must first establish two things: What constitutes ideal cash-flow-generating investments? And what is the best time to invest in an underperforming equities market?

Our philosophy is that a portfolio should have several different cash-flow-generating investments to help manage risk and maximize income potential. Examples include real estate, private equity, private debt, infrastructure and other alternative strategies.

The question of how and when to participate in an underperforming equities market is a bit more challenging. Public equities have experienced a significant selloff year to date, and many believe there is more room for them to fall. The main reasons being inflation, interest-rate increases, the ongoing war in Ukraine, supply chain challenges and a possible global recession. None of these issues appear to be dying down soon.

However, at current levels, we believe that many public equities are a significant bargain and may be considered an undeniable buying opportunity. The key for us is to continue to manage risk, which we feel is best accomplished by using the portfolio’s cash flow to its fullest potential through dollar-cost averaging and reinvesting.

As an investment strategy, dollar-cost averaging is as old as the expression “cash is king,” but that doesn’t make it less applicable, especially now.

Dollar-cost averaging is predicated on the fact that purchasing equities shouldn’t be an isolated incident. By investing a fixed amount of capital each month in a selected fund, an investor will end up buying more shares, or units, when prices are low, and less when prices are high. Adhering to this strategy should lower that investor’s average cost in the fullness of time.

Similarly, by redeploying a diversified portfolio’s earned cash flow (for example, dividends, rents, interest payments, income, etc.), investors can participate in the equity markets using that cash to purchase good quality assets at a discount. This can be one of the most powerful tools available for boosting investor returns in the long run.

By constructing a well-balanced portfolio that focuses on cash-flow-generating assets, an investor can carefully invest in an underperforming equities market, even in volatile times.

Cash flow is important because, through dollar-cost averaging, that cash can be used to potentially lower the average cost of investing. It can also be routinely generated from an investor’s portfolio and be used to grow the value of an investor’s wealth faster, while potentially minimizing the volatility of the portfolio.

The best part? Cash flow is found money within the portfolio that has not been factored into personal budgets or spending plans, which makes the risk both measured and manageable.

Laura De Sousa is a wealth adviser and client relationship manager at Nicola Wealth Management Ltd..


If you liked this story, sign up for more in the FP Investor newsletter.

This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required securities commissions.