Russ Koestrich: Enormous Cash Still on the Sidelines

The head of Investment Strategy at BlackRock

, Russ Koestrich believes investors are still remaining on the sidelines, and he believes that is not where the individual investor should be heavy, in light of a ~3 percent inflation. "It is a function of the general trauma retail investors have had for the last 12 years." Koestrich told CNBC's Squawk on the Street. "Think of those who entered the market in the late nineties, went through the 200 bear market, then the 2008 bear market, the flash crash, last summer's volatility." "There is an enormous amount of cash on the sidelines." he says. "Part of [our] message to the retail investors is that, first, stocks are reasonable in comparison to bonds." "Second, there may be times when it makes sense to raise your cash levels." Koestrich notes. "But to keep large portions of your portfolio in cash when environmental levels of inflation are running at 3 percent--over 20 years, you lose a lot of purchasing power without approach." He believes investors should return to the market, as the stock market rally is sound due to fundamental growth, fading European woes and stocks being cheaper than bonds. In terms of threats ahead, while he views oil as a near-term headwind, he thinks fiscal debate stands to derail markets even more adversely towards 2013. "The real risk to me is not in 2012 but early 2013," he notes. "The economy is recovering, but recovery is fragile. Next year we got a lot of fiscal drag. Taxes are going up. And if a lot of the fiscal plans being thrown around are implemented, I am afraid of what they may mean for businesses and the business-friendliness of our country."