It is a well-known fact that one of the best ways to protect wealth is to have a diversified portfolio. It does not matter if you have $1,000 to your name or $1,000,000, keeping it all invested in one asset class is a bad idea. If things should take a turn for the worse, your life savings could be lost in one fell swoop. Spreading your wealth over several different asset classes is one strategy can help to protect you from a downturn that affects some, but not all sectors.
Since the recession of 2007 to 2009, the interest rates on cash assets have been very low. In the 1980s and 1990s interest rates on money market and other cash accounts were typically high enough to protect against the risk of inflation. The rates even hit double digits at times. In an effort to spur economic recovery, the FED cut interest rates. The rates dipped so low that interest rates on savings and money market accounts were essentially negligible. Rates have slightly increased since then, but many cash accounts still pay less than 0.25% interest. Even those that do pay higher interest rates often fail to keep up with the rate of inflation.
Due to historically low rates on cash accounts, many people have been hesitant to keep much of their portfolio invested in cash. While it is wise to invest a large portion of your portfolio in investments that have historically kept pace with inflation and will hopefully generate returns that are higher than the inflation rate, there is still an argument to be made for keeping at least a small portion of your assets in cash.
One of the best reasons to keep some money in cash is your emergency fund. There are always unexpected expenses that come up in life and they can require large sums of money in a very short period of time. When the furnace goes out, the car needs repairs, a medical emergency occurs, or some other unexpected expense comes up, it is good to be able to access the funds you need as quickly, easily, and with as little loss of principle as possible. If you have money in a savings, checking, or other similar account, you can access the funds you need without the delays involved when trying to get money from other, less liquid assets. You can also typically avoid most, if not all of the fees and penalties that often occur when accessing funds from other accounts. As a rule of thumb, you should have 3-6 months of your average expenses saved in an easily accessible, fully liquid emergency fund account.
Another argument for keeping some of your assets in cash is expected expenses. Are you planning to buy a new car, remodel your bathroom, or take a big vacation in the next 6-12 months? If you know that you will have a big expense within the next year that will require additional funds, it may benefit you to investigate moving enough money to cover the expense into a cash account. Moving the funds in advance will allow you to create a plan to help you minimize fees, taxes, and other expenses that you might incur when trying to liquidate the funds. It will also allow for adequate time to move funds that take some time to process. A little advance planning might save you time, money and frustration when the time comes to pay for your expected expense.
While it is easy to say that you should have a certain amount of cash available in a cash account, it is not always easy to calculate exactly how much is the right amount and what is the right way to fund that account. A Financial Advisor can help you to plan for your cash needs. It is a good idea to sit down with a Financial Planner and determine just how much you need in your emergency fund. They can help you assess your needs and plan appropriately. A good Advisor can also help you to determine the best way to save or reallocate funds to prepare for an upcoming expense. Sitting down with a Financial Planner can help you address a variety of financial needs including, but not limited to your cash assets.
If you would like to discuss the use of cash in your portfolio, please contact us and we would be happy to discuss it with you further.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.
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