Cash is king, right?
It’s hot, sexy -- the symbol of the good life. Nobody makes it rain brokerage statements in the club, or flashes a wad of bond certificates to impress the ladies.
But when it comes to investing, cash plays a more workman-like role in a well-crafted portfolio. It provides some insulation against market gyrations, and allows for flexibility– in and out of the stock market.
Of course, these benefits come at a price. While it was once possible to earn a modest return on cash held in a money market or similar account, those days are long gone. Today’s sub 1% return on cash means inflation is slowly wearing away at your dollars like water over a river stone. And, even if you were getting a return for your cash, it wouldn’t be near the potential return you’d get from investing that money in stocks and/or bonds.
The amount of cash you keep in your portfolio will vary depending on your age and life circumstances. Consider the following as you decide how much cash to stash. Note that we’re talking about cash in your investment portfolio, which is separate from your emergency fund.
Early Stage Cash: If you are decades away from that gold watch, you want pretty much every available dollar working to growing your retirement savings. That means putting your money into the market via your employer’s 401k and other investment vehicles. The emphasis during these years will be on growth stocks.
Life Events Cash: If you are anticipating a major life event, like buying a home, you may choose to divert some of your savings into cash to fund that event. Afterwards, turn the flow of dollars back to the market. If you are maxing your 401k contribution ($18,000 per year, $24,000 if you are 50-plus), you may want to hold a little more cash – but not a lot. Even a taxable brokerage account will give you a much better return than a CD or other cash-holding account.
Retirement Cash: As you near retirement, your focus will turn from growth to stability. Bonds are a good way to meet this need. We recommend “owning” your age” in bonds, which means if you are 60-years-old, 60 % of your portfolio should be in bonds. But cash can provide added stability. If you are in your 60’s, consider holding 3-5% of your assets in cash and greater than 5% in your 70s and beyond.
Active Vs. Passive Approach: The size of your cash holdings will also depend on how active you are as an investor. If you are an active investor looking to make a profit buying and selling stocks on your own as part of your investment strategy, you’ll want to keep enough cash on hand to take advantage of opportunities as they arise. If you are a passive investor, continue to watch your 401k and other assets grow under professional guidance, you obviously don’t need that added cash reserve.
Cash. You knew it was fun to party with it. Now, you know it’s a great financial partner, too.