Question:  

What role should cash play as a position in my portfolio?

Answer: 

Like the answer to all financial questions, “it depends.” Variables such as personal goals and risk tolerance are important roles in determining your unique need for and relationship to cash. It will depend on whether you have a mortgage, outstanding student loans, are considering a new business venture, or are thinking about retirement. 

Risk tolerance is a combination of how you might feel and react if the market dropped in value along with other determinants such as age, income, and timeline. Your risk tolerance may be different at various times in your life, changing based on circumstances. Collaborating with a trusted advisor is a wonderful place to start and have the conversation of what role cash can play in your investment plan. 

Flexibility

Cash provides flexibility and the potential to take advantage of worthwhile opportunities. If valuations decline, you are able to deploy cash at advantageous times. Cash also acts as an anchor. If you are fully invested and lose 20% in the market, that 20% is a deeper loss than if you held 80% in equities and 20% in cash. In the second example, the overall loss would be mitigated to 16% helping to stabilize through diversification. Again, this is an example, and your situation depends on risk tolerance and specific needs. 

Cushion

Cash can serve as a buffer or safeguard for unexpected expenses. These include medical costs, a health crisis, job loss, family emergencies, home repairs or on a more positive note, potential opportunities. Evaluating your monthly cash flow needs and expenses is a starting point to determine a necessary foundational amount to keep on hand serving as a buffer for easy access. 

The purchasing power of cash can deteriorate in an inflationary environment and is a real concern. However, if you run into unexpected expenses and need to suddenly liquidate assets, you could incur a loss. This might be greater than the potential loss to inflation on idle cash. Fear can cause investors to hoard cash in times of uncertainty. There are implications to this as well. 

Risk tolerance and time are unique factors to keep in mind. Bucketing cash into long-term, mid-term and short-term needs provides a clearer picture of how much to hold. Bank deposit programs and money market funds might work as a low-risk option in conjunction with bonds. Rebalancing these buckets is as important as reviewing your entire portfolio as you move into and through each new phase of your life. 

The FDIC insures up to $250,000 per depositor, per ownership category, per FDIC-insured bank. It is a good idea to check with your financial advisor to determine what is insured and what is an excess deposit. There may be other programs available providing higher levels of coverage. These types of offerings put cash in your brokerage account into interest-bearing deposit accounts at multiple banks. 

Cash can be a vehicle of opportunity and can provide a feeling of safety in an unstable market or recession. The factors to consider around how much cash to keep liquid or near liquid are as unique as you are with many choices and options available. The good news is that there are plenty of ways to work with the cash you have. Your trusted CERTIFIED FINANCIAL PLANNER™ Practitioner can help point you in the right direction, provide details and current rates. Stay focused and plan accordingly.