Eight Reasons to Hold Some Extra Cash
The comments below are an edited and abridged synopsis of an article by Lance Roberts
In portfolio management, you can only have two of three components of any investment or asset class: safety, liquidity and return. Cash is the only asset class that provides safety and liquidity. Obviously, this comes at the cost of return.
Here are the options: fixed annuities (indexed)—safety, return, no liquidity; ETFs—liquidity, return, no safety; mutual funds—liquidity, return, no safety; real estate—safety, return, no liquidity; traded REITs—liquidity, return, no safety; commodities—liquidity, return, no safety; gold—liquidity, return, no safety.
No matter what you invest in, you can only have two of the three components. This is an important consideration when determining portfolio construction and allocation. What you need to understand is that liquidity gives you options.
While a rising tide lifts all boats, eventually the tide recedes. One simple adjustment to a portfolio that will serve investors well: When risks begin to outweigh the potential for reward, raise cash.
The great thing about holding extra cash is that, if you are wrong, you can adjust to increase the risk in your portfolio. However, if you are right, you protect investment capital from destruction and spend less time getting back to even, and spend more time working towards long-term investment goals.
Roberts lists eight reasons why having cash is important. He is not talking about being 100% in cash, but rather suggesting that holding higher levels of cash during periods of uncertainty provides both stability and opportunity.
With the political, fundamental and economic backdrop becoming more hostile toward investors in the intermediate term, understanding the value of cash as a hedge against loss becomes more important.
Given the length of the current market advance, deteriorating internals, high valuations and weak economic backdrop, reviewing cash as an asset class in your allocation makes sense. Chasing yield at any cost has not ended well for most.
Of course, since Wall Street does not make fees on investors holding cash, there may be another reason they want you to remain invested all the time.