Here’s How Much Every Investor Should Allocate to Cash
You never know what life can throw at you…
The market could fall 50% and give you a rare shot to buy dirt-cheap stocks. You could discover a lucrative business opportunity. Or a huge medical bill or lawsuit might blindside you.
That’s why you need cash.
You see, cash is the universal asset class because everyone needs it. And at Palm Beach Research Group, we like cash because it provides optionality.
So how much cash should you have ready to cover life’s unpredictable events?
Today, we’ll tell you how much you should keep on hand.
But first…
Cash Gives You Stability
Cash is safer than most other investments. But holding cash still comes with risks…
The U.S. dollar can (and does) devalue relative to other currencies. And there’s always the risk that inflation will eat away at your cash savings.
On top of that, if you keep your cash at home, you could lose it to theft or in an accident. If someone burglarizes your home or it burns down… There goes your retirement.
So the idea that sitting on cash is riskless is a fairy tale. That being said, cash can stabilize your portfolio in volatile times.
Let’s say you have a $100 portfolio – with $50 allocated to cash and $50 to stocks. If your stock portfolio goes down 10%… Your stock position is now worth $45.
But your overall position is $95 ($50 in cash + $45 in stocks). So your portfolio has only lost 5%. And if your stock portfolio loses 20%, your overall portfolio only goes down 10%. So cash can ballast your wealth during a market pullback.
This is just hypothetical… But it demonstrates the power of asset allocation. That’s the process by which you spread your wealth across different types of investments.
Cash Gives You Flexibility
In our asset allocation model, we generally recommend you keep 5–10% of your portfolio in cash.
At certain times, you can deviate from this allocation. For instance, if market volatility is causing you to lose sleep, you can always allocate more cash than that.
That cash can come in handy… After a market decline, you can use it to purchase other assets when they’re on sale.
If you want to sit on the sidelines for a while, you can even earn some interest on your cash.
For example, you can make 5% in a short-term money market account or by purchasing three-month Treasury bonds. That’s the most you can earn through those instruments in nearly a decade.
Once the market settles down, you can use your cash to buy growth companies that have been beaten down and are selling at deep discounts.
So if you’re worried about volatility, it’s fine to raise additional cash.
It will give you options. And you never know what opportunities life might throw at you. So keeping some cash on hand is always a wise decision.
But that doesn’t mean you should completely abandon stocks. When the tide turns, investors who hold onto their quality investments will make a lot of money.
Palm Beach Research Group
This article was originally published on this site