Do You Keep A Stash Of Cash In Your Portfolio?

By: ispeculatornew
Date posted: 03.28.2013 (3:00 am) | Write a Comment  (4 Comments)

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cashIn all of the talk that goes on about asset allocation, I always feel like one asset class is often forgotten: “Cash”. The fact that it is a boring, extremely low return asset should not be enough to stop you. I think any individual, no matter how rich or poor should hold part of its assets in cash. Why?

Capability to capture opportunities: When markets suffer major losses as has happened in 2001, 2008 and in many other instances, many investors panic. That means they need or want to get out as quickly as possible with no regards for the price that they get. In some cases, they are leveraged and have no choice but in many others, it’s a matter of stopping the pain that they feel over big losses. When such events happen, many assets become very attractive for those that have free liquidity. It’s not about trying to capture the absolute bottom but rather about buying assets at cheap prices when others panic. This has certainly happened in the real estate markets lately and in the stock market in general following the 2008 credit crisis.

Liquidity: As human beings, we are able to act much more rationally if we have some level of reserves. This mostly means less stress about losing our job, our insurance, taxes, about running into liquidity problems, etc. For the same reason, having enough space to withstand margin calls or other needs related to investments is also critical.

Resist The Urge Of Reaching For Yield

In this low rate environment, it can be very tempting to buy products that carry a bit more risk in order to get some kind of return. That”s fine but it should only be used for a part of a portfolio and in no way should be considered an alternative for carrying cash. When $hit hits the fans, assets that were considered fairly safe can lose their value because no one is trying to buy them.

How Much Cash To Hold

As you can imagine, there is no clear answer to that answer. Every person would probably have a different opinion. I personally feel like having about 1 year worth of cash available would be ideal. That being said, I have no intention of putting all of my assets into cash. It would mean an opportunity cost that would be too important. What I have been doing is simply increasing the amount of cash that I hold gradually over the years, making it feel almost seamless while still being in a better position every year.

How?

-I guess it all depends on how much you actually hold. The first few hundreds can be owned in cash at home (maybe not under your mattress though). Then you’d start adding money to your bank account and after reaching a certain level of assets, you can add more cash to short term CD’s for example. If I have $10,000 available then I wouldn’t mind having any residual cash in CD’s that are invested for 30 or 90 days knowing that I’ll be able to get those proceeds at most 90 days after starting to tap into the reserves held at the bank. Holding too much cash in a bank account can turn out to be a bad idea as Cyprus depositors found out in recent days…

What are your thoughts? Do you hold cash? 

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4 Comments

  1. Comment by Steven J Fromm — March 30, 2013 @ 12:01 pm

    Nice post and I have always believed in a cash reserve. I tell clients at least 6 months of earnings even more if you can afford it.
    I like the idea of using short term CDs even though the rates are now horrible. Perhaps even staggering or a laddering them over different time frames would work.
    Pouncing on market opportunities is worthwhile if you have guts to jump in when the sky is falling for most.

  2. Comment by IS — April 2, 2013 @ 5:55 am

    @Steven, That certainly makes a lot of sense even thoug as you mention, those rates are so low.. it doesn’t give much incentive to put money there

  3. Comment by Mark — April 4, 2013 @ 9:01 pm

    One way I do CDs is called laddering.For example, $2,000 in a 6 month CD,$2,000 in a 5 month CD, $2,000 in a 4 month , $2,ooo in a 3 month, $2,000 in a 2 month , and $2,000 in a 1 month. Something always coming due every month and is re-invested for 6 months.

  4. Comment by IS — April 5, 2013 @ 3:54 am

    @Mark – That is great, how long have you been doing this and what kind of rates are you getting?

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