The markets are volatile, and investing is complicated. So, what’s the best way to get started? The simplest answer is that you should buy what you can afford to lose. But what is “affordable”? How much of your portfolio should be in cash, and how much in stocks? What percentage of each should you allocate to each? And how should you measure your success?
Being able to invest your money is one of the best ways to grow your wealth. Of course, this doesn’t mean that you should blindly put all of your money into investment opportunities, especially not when that money is invested in the stock market.
This is a hot topic of debate among many investors. The consensus is that you should have a portion of your portfolio in cash that is equal to at least 3-5% of your total portfolio, but that is the consensus. What happens when you are faced with the decision of how much cash to hold? There are many different answers, so I am going to give you my advice on how I would decide on my portfolio.
Most investors will tell you to invest in a portfolio of stocks, bonds, and cash. That’s true, and it’s a good rule, but it’s also a bit of a catch-22: I can’t invest in cash, and I can’t invest in stocks and bonds at the same time. To solve this problem, you must allocate a percentage of your portfolio to cash. The percentage depends on how much of your portfolio you hold in cash and the importance you place on not running out of money.
Everyone wants to know how to invest their money, but for most people, the thought of determining how much of their money should be in cash and how much in stocks or bonds is daunting. It’s not as easy as you might think because the majority of the people who successfully invest but know nothing about investing.
Cash is a great inflation hedge. While money market funds and bank accounts do offer a measure of protection against inflation, most investors don’t have any of these alternative investments. Cash does have a major drawback: it’s not a very liquid investment. When you hold cash, you’re locked into holding it for some time, and you can’t sell it very easily.
As a lender, your primary goal is to make money – after all, you wouldn’t be a lender if you didn’t expect a return on your money. So the answer to the question of “How much of my portfolio should be in cash?” is obviously, “As much as you can.” This is because you’re essentially taking a bet on the future – you’re betting that the US economy will do well enough that you’ll be able to sell your mortgage-backed securities for a good enough price that you’ll be able to make a profit.
It’s no secret that this is an exceptionally volatile time for financial markets. But with all the turmoil, it’s easy to forget that the overall market is still very much in the middle of a long consolidation cycle. That’s not to say that the current environment is an easy one to navigate. If you’re considering initiating a new investing strategy, like investing in cash, now may be a good time to do it.
The general rule of thumb is that a good portion of your investments should be in the form of a liquid asset in case a massive financial disaster hits tomorrow. The percentage of a portfolio in cash is a common question in the financial world. The “cash” portion of your portfolio is too important to ignore. It should account for no less than 20% of your portfolio, ideally between 60-80% depending on how long you plan to be retired.
There is no perfect percentage of your portfolio in cash. The cash percentage will be different for each person depending on his situation. A person in great financial shape can handle more cash than a person who is not in great financial shape. A person who is saving for retirement can also handle more cash than someone saving for a vacation. The amount of cash in your portfolio will change with your situation.