This Is How Much Cash You Should Hold
If there is one lesson the last few years have taught us, it’s…
You never know what life can (and will) throw at you.
- The market could fall 50% and give you a rare shot to buy dirt-cheap stocks.
- You could discover a lucrative business opportunity.
- A huge medical bill or lawsuit might blindside you.
- A friggin pandemic can pay a visit
That’s why you need cash.
You see, cash is the universal asset class because everyone needs it.
And I LOVE cash because it provides optionality.
So how much cash should you have ready to cover life’s unpredictable events?
Today, I’ll tell you how much you should keep on hand.
But first…
Let’s get clear why you need it as part of your investment portfolio, IN ADDITION to your emergency fund and your cash safety net.
REASON: Cash Gives You Stability
Cash is safer than most other investments.
But holding cash still comes with risks…
The US $, GBP £, Euro and all developed world currencies can and do devalue relative to other currencies.
And other currencies (especially emerging market currencies like the Peso, Rand, Renminbi and so forth) are very volatile and their value relative to developed currencies goes up and down like the Hulk roller coaster at Universal studios and can make you feel equally sick as a ride on that thing.
And then there’s inflation.
With time the purchase power of your cash reduces, and inflation eats away at the real value of cash savings.
On top of that, if you keep your cash at home, you could lose it to theft or in an accident. If your home burns down… there goes your retirement.
So, the idea that sitting on cash is riskless is BS.
That being said, cash can stabilize your portfolio in volatile times.
Let’s say you have a $100 portfolio – with $50 allocated to cash and $50 to equities. If your equity portfolio goes down 10%… your equity position is now worth $45.
But your overall position is $95 ($50 in cash + $45 in equities).
So your portfolio is only down 5%.
(Remember it’s a “paper loss” – it only becomes a realise loss if you go and sell out of panic)
And if your equity portfolio “loses” 20%, your overall portfolio only goes down 10%.
So cash can ballast your wealth during a market pullback.
This is just hypothetical… But it demonstrates the power of asset allocation.
That’s the process by which you spread your wealth across different types of assets.
Still, it doesn’t answer how much you should allocate to cash.
How Much Cash Should You Hold?
I invest in a highly diversified portfolio using my Multi-Asset-Class Risk-Assessed Portfolio Framework.
This framework includes conservative investments… speculative investment…fixed income holdings… tangible assets… intangible assets… real estate… commodities… precious metals…portfolio hedges… and true alternative assets.
And with all the upheaval caused by Covid, mass money printing, political tomfoolery (I’m trying to be polite and would far rather say complete idiocy) and economic turmoil, I’m leaning into my asset allocation and diversification model even more as THE THING that will smooth out the ride and provide the best possible returns.
In these turbulent times I have adjusted how much I allocate to cash upwards. I now suggest you keep up to 10% of your wealth generating net worth in cash.
Remember this is cash IN ADDITION to your emergency and cash safety net which sit outside your wealth generating networth on your balance sheet.
Cash investments include fixed deposits, money markets, CDs, and certain cash-like ETFs and money market unit trust / mutual funds.
Whatever life throws at you, cash typically “meets the need” better than anything else.
And what life throws at us is not always negative.
Cash also gives you access to respond to opportunities.
For example, when the market had its tantrum in March 2020 and nose-dived with all the pandemic is here chaos and end of the world talk the media loves, I was able to use the cash in my portfolio to snap up loads of fabulous company shares (using cost effective index trackers) and as the market came back massively, I made a huge gain.
Cash lets you buy when the market has a sale.
Cash is just one of the 8 Asset Classes in the Multi-Asset-Class Risk-Assessed Portfolio Framework I use to design and manage my investment portfolio.
Remember, knowledge is your path to freedom, keep learning about the fascinating world of asset generated wealth and get these amazing things working for you.
