Warren Buffett is Stockpiling Cash: Should You?

NEW YORK (MainStreet) — Warren Buffett has been quietly building a fortress of cash in the Berkshire Hathaway investment portfolio. The mammoth conglomerate's latest quarterly report, released Friday, reveals a staggering $55 billion on the sidelines – more cash than has ever been parked in the portfolio's history -- and twice as much as Buffett claims he likes to keep on hand. Is the stock market that overheated? Should you be moving to cash as well?

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Admittedly, Berkshire Hathaway is not your typical portfolio. An asset gorilla among puny money-running monkeys, its every move is carefully noted and quoted. There are simply few companies large enough to warrant its attention, and Buffett refuses to pay out a dividend to investors and rarely buys back shares. With a lack of suitable investment candidates, Buffett is content to lie in wait for a suitable prey.

But it's not only Warren Buffet. Mutual funds have been moving to cash for some time now. Morningstar notes that the average mutual fund now holds a cash balance of more than 8%, the highest allocation since late 2005. With rising volatility and potential "investor fatigue" setting in, market watchers are seeing a flight from risky assets.

Read More: When Cash Is a Better Investment

"Stock prices are lofty and not a lot of bad news is priced in to the market," writes Russ Koesterich, senior investment strategist for BlackRock, in an analysis. "Even with decent earnings, it appears that investors are getting nervous. Although the U.S. economic recovery appears to be gaining steam, lofty stock prices and rising geopolitical risks are finally taking a toll."

Private equity firms are also sitting on reserves.

"Capital available to private equity fund managers is currently standing at a record high with $1.16 trillion available for investment, representing an 8% increase from December 2013," says London-based Preqin Ltd., in a quarterly update.

While Bob Doll of Nuveen Asset Management admits volatility is a concern, he is not looking for a pronounced downturn.

"With so many potential triggers for a market correction, we think the likelihood of a pullback in equity prices is growing, and we expect investors may experience a bumpy ride in the coming months," Doll admits in an investor note. "We do not believe a bear market is in the works, however. Bear markets tend not to develop unless a recession or a collapse in earnings is imminent, and today both economic and earnings growth are improving."

And Doll says investors should never attempt to time the market by moving assets into and out of "risky" investments.

"We do not believe it would make sense for investors to scale back on equities and move to the sidelines," he says. "Volatility appears to be rising and we could see additional pullbacks, but trying to time the markets is a losing proposition. Over the next year, we expect equity markets to produce returns in the high single digits, while some areas of the bond market may struggle in the face of rising rates."

--Written by Hal M. Bundrick for MainStreet

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