How Much Cash Should You Have in Your Portfolio?


 

There are two main schools of thought among investors when it comes to cash. Some investors view cash as a wasted asset that could be earning far higher interest than it ever would in a savings account. Others believe that keeping some cash on hand provides a wealth of opportunities.

So how much cash should you keep when building your investment portfolio? While there isn’t a one-size-fits-all answer, there are potential risks and rewards you should consider as you determine the role that cash will play in your portfolio.

Differentiate Your Cash

The cash you keep for your portfolio goes well beyond your emergency cash and retirement funds. Most financial experts will agree that you need to have at least six months of expenses set aside to hold you over in case of an emergency or change in your career.

Your retirement accounts are also not to be considered cash within your portfolio. The assets within your 401(k) and IRAs are completely tied up and won’t be of use to your trading strategy.

Why Keep Cash In Your Portfolio?

The real key to keeping cash on hand is so that you can strike when the right financial opportunity arises. If the market hits a low, you want to have cash on hand so that you can take advantage of stock prices that you anticipate rising once the market stabilizes.

Investors that have all of their assets tied up in stocks often miss these opportunities or are forced to choose whether to sell off stocks well below market value in order to purchase more. Keeping cash in your portfolio allows you to maintain an agile investment strategy and make smart financial decisions.

The Right Amount of Cash in Your Portfolio

Once you have built your emergency fund, it is time to decide how much cash you should include in your portfolio. Much of this decision will be based on your personal risk strategy, when you plan to retire, and your overall cash flow.

Investors will continue to debate the ideal ratio of cash to other investments in a well-diversified portfolio. Some investors believe you should keep 3 to 5% of your portfolio in cash,[i] while others think it is acceptable to keep up to 30%.[ii] The investment mix that is right for you will likely fall somewhere in between.

The Downside of Cash

For many investors, the issue with keeping cash on hand is that it won’t earn the dividends and interest that stocks or bonds could.[iii]  Many investment accounts provide no interest on the cash you leave there waiting for the right investment. In 2018, the average savings account interest rate nationwide was only 0.08% for all balances, according to the FDIC.[iv]

To avoid losing value due to inflation, look for an account that will earn interest while providing you with the fluidity to move your funds should an opportunity arise. Try a  Premium Money Market Account  that will pair the high-yield interest you are looking for with the check-writing privileges you need to move your money quickly.

Don’t let a financial opportunity pass you by because you didn’t have the necessary resources on hand. Start diversifying your investment portfolio today by building up your cash reserves.



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Footnotes

[i] “Should You Keep Cash In Your Portfolio” Consumer Reports. http://www.consumerreports.org/cro/news/2015/02/should-you-keep-cash-in-your-portfolio/index.htm 24 Feb 2015.

[ii] “How Much Cash is Too Much Cash for Your Portfolio?” http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2015/03/25/how-much-cash-is-too-much-cash-for-your-portfolio 25 Mar 2015.

[iii] “Should You Keep Cash In Your Portfolio” Consumer Reports. http://www.consumerreports.org/cro/news/2015/02/should-you-keep-cash-in-your-portfolio/index.htm 24 Feb 2015.

[iv] “Here’s How the Average Savings Account Interest Rate Compares to Yours” GoBankingRates. https://www.gobankingrates.com/savings-account/what-average-savings-account-interest-rate/ 20 August 2018

How Much Cash Should You Have in Your Portfolio?