While it’s important to divide your assets between stocks and bonds, cash plays an important role in your asset allocation.
Cash as an investment vehicle is not the same as any cash in your emergency fund, which should be the equivalent of three to six months’ living expenses. Successful investment portfolios sometimes have a slice of their pie invested specifically in liquid (cash) investments. Here’s why:
Stocks, bonds, and mutual funds
Stocks, bonds, and mutual funds have an important spot in your brokerage accounts, but even the most solid stock, highest rated bond, and diversified mutual fund carry a certain level of risk.
Assets in fixed income, bonds, or CDs traditionally have lower levels of risk than stocks, but are not all guaranteed investments. Furthermore, for all their dependability of paying on a set schedule, bond payments may not keep up with the rate of inflation and certainly can’t compare to the potential unlimited upside of stocks.
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The problem with bonds and other similar types of investments is that you can’t always sell them in a hurry, and if you do, it may be at a loss. Therefore, a huge advantage with keeping some of your assets in cash is liquidity. While cash won’t necessarily pay you as much as your other investment products, it’s accessible, and in a depressed market it may provide you with the most options.
The percentage of your assets that you should leave in cash depends on your investment goals and personal level of risk. While many investors leave 3%-5% of their assets in cash, more conservative investors should increase this level.
Cash, though often ignored in asset allocation, shouldn’t be forgotten, especially during times of market volatility. Having liquid investments protects your other investments, because in times of trouble you may not need to sell at a loss. Ask your financial advisor today about the best way to divide your assets.
For more advice on how cash fits into your total asset allocation read this.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published March 25, 2015. Updated August 2019.