Financial advisors often get the bad reputation of disliking cash and being “all in.” The most recent “cash is trash” quote by a prominent investment manager is not helping our image either. However, we feel that holding an appropriate amount of cash in your portfolio can be the financial equivalent of taking a deep breath to relax. Cash can enhance your ability to make thoughtful investment decisions instead of impulsive ones. Having a cash position coupled with a disciplined investing strategy can change your perspective on market volatility. A well planned cash allocation can help alleviate wild market swings during times of volatility. Additionally, knowing that you are positioned to take advantage of sudden opportunities by picking up investment bargains may increase your ability to be patient.
It’s also important to find the right balance of cash vs. securities in your portfolio. The benefits of cash don’t necessarily mean you should start immediately liquidating your securities. Selling during a down market locks in any investment losses, and a period of extreme market volatility can make it even more difficult to choose the right time to make a large-scale allocation change. Watching the market move up after you abandoned it can be almost as painful as watching the market move down. While we advocate maintaining a cash position during these uncertain times, we certainly do not recommend significant allocation changes without reviewing your long-term goals.
Finally, it’s important to not confuse the cash allocation in your portfolio with the financial cushion a savings account provides to help you overcome emergencies. Keeping your investment portfolio separate from your savings account is essential for you to avoid liquidating your investments at an inopportune time to meet unforeseen expenses or emergencies. It’s important to separate the cash you allocated for future opportunities from the cash you allocated to get you through a rough patch.