When people discuss their portfolios, they typically refer to commodities, stocks, bonds and real estate that they own. The discussion might as well consist of inclining towards and away from different asset classes, and re-balancing. What we rarely get to hear is, cash!
Cash is indeed beneficial when you plan to purchase grocery at the farmer’s market – or anywhere else that doesn’t take debit or credit. But the question is, in your investment account, how much is too much? It’s a question completely worth pondering with strong potential to divide the opinions of financial advisors.
Cash as an asset
It’s totally debatable as to how much of your portfolio should comprise of cash. When your money, as an investment isn’t put to work, it’s stagnating due to inflation. Over the long-term, it’s witnessed that cash will definitely provide the smallest returns in comparison to shares and property, especially with the current bank interest rates being so low. The real key to keeping cash on hand is so that you can utilize it when the right financial opportunity strikes in. It the market hits low, you would need cash on hand to take advantage of the stock prices that you anticipate rising once the market alleviates.
Typically, investment strategy focuses on risk-return profile, finding a balance between debt-equity portions and at the same time, managing risk. One set of portfolio that consists of cash is not given much attention, because seldom investors disclose cash levels. For most investors, the minimum level of cash that they keep as an emergency fund amounts to three to six months of expenses. Contingency fund not only backs you up in the times of financial crisis, but it also helps you to keep your long term investments intact.
Market Volatility
Financial markets are prone to sudden collapses and periods of uncertainty, every once in a while. As an aftermath of such crises, the markets are volatile in the extreme. In such scenarios, the best advice is to do nothing until the dust settles. One common strategy that works during such times is to switch to 50 percent cash and to utilize the other 50 percent of your portfolio in your low risk investments. You can more cash once the markets are slightly better and stable.
They key here is that you’ll need money to buy things right away. If not, you’ll have to sell your securities to make some purchase, or probably borrow money to make an investment. Your ideal cash holdings will largely vary depending upon how often you buy shares, and the quantity of shares you need. Don’t let a financial opportunity pass by just because you did not have the necessary resources by your side. It’s time for you to start diversifying your investment portfolio, if you haven’t already. One way to do so is by building up your cash reserves.
Image source: ThinkStock/Getty