How Much Cash Should You Carry in Your Portfolio?
While there is no doubt that that having plenty of cash is a good thing, when it comes to investing and having cash in your portfolio, it’s still quite controversial. The question about what could be considered “too much” cash in your portfolio is still one that’s debated hotly.
They heat under that debate was turned up even more recently when Intelligent Portfolios was launched by Charles Schwab. It’s an algorithm-based platform that automatically builds and automatically balances someone’s portfolio. What raised a lot of eyebrows was the treatment of cash that Intelligent Portfolios gave, allocating anywhere from 6 to 30% for cash based predominantly on the risk profile of the investor.
Charles Schwab responded to the criticism by saying that “There’s no right or wrong answer to how much cash an investor should hold as an investment, it is a strategic decision,” adding that “Is easy to question cash in the sixth year of a bull market and when the Federal Reserve is artificially suppressing interest rates, but we don’t invest based on the last six years. We invest based on what we expect the future may hold. Bull markets end an interest rates rise. When they do, a little cash will feel pretty good.”
One thing that both sides agree on is simply this; there isn’t a “one-size-fits-all” solution. Every investor has a different risk tolerance, different investment goals, a different investment horizon and different investing strategies. That being said, the advice below should help each individual investor to determine how much cash is best in their particular portfolio.
First is simply to keep household cash and portfolio cash separate. You should have a certain amount of cash in your portfolio and keep separate accounts in your bank and in an emergency fund. The fact is, experts agree that there isn’t a huge benefit to having a large amount of cash in your portfolio but, as far as household cash is concerned, having at least six month’s worth of living expenses in an emergency fund (and, even better, 12) is a good idea.
Once you determine that you have enough emergency savings, it’s time to figure out how much, and which proportion, of your investable assets you should keep in cash in your portfolio. Keep in mind that cash in your portfolio doesn’t produce any yield, which has led to the term “cash drag”.
The fact is, many experts believe that having too much cash holdings in your portfolio is simply a sign of either fear or emotional concern. They suggest that keeping your emotions in check is the best way to figure out how much cash you should have in your portfolio, and also to keep in mind that keeping up with inflation is hard to do with cash.
One last note is that keeping a lot of cash in your portfolio because you’re either afraid of the future or, even worse, trying to time the market, is a big mistake. The fact is, a look back at investing history will show you that timing the market is very difficult, both for amateurs and professionals.
Filed under: Investing
Like this post? Subscribe to my RSS feed and get loads more!