Famed investor Warren Buffett likens cash to oxygen—never thought about when present but the only thing on your mind when it’s absent. In spite of the vital role cash plays in a portfolio, many downplay its importance because they want to help maximize their assets’ earning potential. While liquid assets have a low return, a well-balanced portfolio takes liquidity into account.
We aren’t suggesting you start hiding hundred dollar bills under your mattress, for several reasons, but having cash in an FDIC-insured checking or savings account is crucial. Although, even if you know you need cash on hand, you might question how much.
How do you determine a reasonable number?
Though the amount varies based on your unique needs and goals, there are a few points to consider. For a number that is completely customized to your portfolio, reach out to your financial advisor to review your assets and decide what makes sense for you.
In this article, we’ll cover why it’s essential to keep cash in your portfolio and how much cash you should have on hand. Let’s take a look.
The Role of Cash in Your Portfolio
Why does a well-balanced portfolio account for liquidity? Here are a few of the main reasons:
Taking advantage of possible opportunities.
With cash on hand, you’re able to move quickly with investment opportunities. If a stock you’ve had your eye on drops to a price you can’t pass up, for example, liquidity allows you to make your purchase before you miss your chance.
Having a well-balanced portfolio.
Depending on your risk tolerance, you may be more inclined to put less focus on cash because you want the maximum return possible. As enticing as that may be, cash adds stability to your portfolio that you will appreciate when the market hands you a loss. Even a small percentage of cash can lower your risk to a more manageable level while still seeing substantial progress.
Feeling confident with market fluctuations.
Cash can be comforting. When you know you have enough to sustain your expenses through rough market periods, you can make financial decisions with logic instead of emotion. Without cash, a severe drop in the market can lead to panic and stress, pushing you toward unwise choices. Feeling confident in your position helps you stay strong through volatility so that you can benefit from future gains.
How Much Cash Do You [Really] Need?
We didn’t lead you all the way here to be left empty-handed. We’re sorry to say, though, that the amount of cash in your portfolio depends on a few factors. Your age, goals, risk tolerance, and amount of assets all work together to help your financial advisor identify an appropriate amount. Advisors suggest anywhere from 5% to 30%, which is a significant difference, but it gives you an idea of what you’re working toward.
Tip: Keep in mind that a good financial goal is to have enough liquidity to pay your expenses for six months. Having this amount saved in an emergency fund helps to protect you from selling your assets as a result of unexpected circumstances.
Get in Touch with Your Financial Advisor
The appropriate amount of cash to have on hand is different for everyone. It will even be different for your own portfolio from year to year as your financial situation changes. Consult a financial advisor to make a well-informed decision about your portfolio’s liquidity. An advisor acts as your ally, mapping your financial goals and empowering you to reach them.
Our team of advisors specializes in portfolio diversity. We work with clients to help deliver maximum returns and confidence. Contact SageSpring Wealth Partners to schedule a consultation with an advisor near you.
