Written by Sean McBride
Whether keeping cash in a portfolio is beneficial or not is a debate that has remained prominent for years. Some may argue that is it is important to put your money to work given the low rates on cash, but we believe that there are in fact many benefits to having cash in a portfolio.
Experts say that if you need funds within the upcoming three to seven years, those funds should be left in cash or cash equivalents. These needs can include the purchase of a new home, college or income needs, etc. If such funds are needed one cannot afford the risk of losing the money in the market. [1]
Having cash in a portfolio allows for investors to respond to opportunity. Sacrificing a little upside allows for investors to be able to invest in new opportunities without having to sell something else in order to capitalize on the opportunity at hand. [2]
Often times, the existence of cash in a portfolio is in fact a residual of the investment decision-making process. A buildup of cash is often times a sign that the investor or portfolio manager could not find stocks that met their parameters and therefore have not invested. [3]
In conclusion, it is important to keep in mind the fact that the stock market is infamously good at enticing investors to move out of cash and up the risk curve. At times putting all your money to work may seem like an attractive plan, but ultimately, keeping cash in a portfolio is important.
[1] Perry Higgins, Michelle. “The Experts: Should You Keep Cash in Your Portfolio?” The Wall Street Journal. Dow Jones & Company, May 2013.
[2] Brakke, Tom. “The Experts: Should You Keep Cash in Your Portfolio?” The Wall Street Journal. Dow Jones & Company, May 2013.
[3] Schoenberger, Chana. “Cash as Trash, Cash as King, and Cash as a Weapon.” Inside Investing. CFA Institute, Nov. 2012