Education is a wonderful thing. If you couldn’t sign your name you’d have to pay cash. ~ Rita Mae Brown, American writer.
Question: How much cash should I keep on hand?
Answer: Once again, the answer is “it depends” based on your individual circumstances. We hear it all the time—Cash is King. Even Warren Buffett, the Oracle of Omaha himself, makes it a rule to keep enough cash on hand to take advantage of potential investment opportunities and steer through rough financial markets. Cash and cash alternatives—including checking and savings accounts, treasury bills, certificates of deposit, corporate commercial paper and money market mutual funds—have become viable sources of relative liquidity while offering a hedge against downturns.
Here are a few myth busters to help you determine the right answer to your question.
MYTH: Cash is a drag on performance.
FACT: When financial markets are going up, cash’s performance may seem less than stellar, but its relatively low risk/reward profile is intended to provide stable value during market declines. Under certain conditions, like times of market turbulence or periods of rising interest rates, cash tends to do well relative to other asset classes. Even when interest rates are low, holding cash or cash alternatives is part of a well-allocated portfolio in which diversification of asset classes may offer benefits in various market environments. Your trusted financial advisor can help you determine the right cash balance amount so you can deploy enough cash to gain the benefits without possibly making potential sacrifices in other areas of your financial plan.
MYTH: Cash outdated it’s just for coffee and tipping.
FACT: It’s helpful to think of cash in two ways. Everyday spending and strategic cash for future needs. While the $20 bills in your wallet are a convenient way to pay for everyday items, cash in your portfolio buys you time to think. Access to enough liquidity gives you flexibility during times of opportunity or uncertainty. You need confidence AND capital to opportunistically add fundamentally sound positions to your portfolio when the stock market is “on sale.” Cash allows you to do just that and help stay on track with your established financial plan.
MYTH: Cash is for skeptics.
FACT: A right-sized cash cushion can actually be a sign of optimism. If market turbulence makes you skittish, increasing your allocation in cash might restore your confidence in your long-term financial plan. Plus, cash tends to do well as a “defensive asset” with low or negative correlation with equities.
Some investors may try to chase yield during unexpected market movements or low-interest rate environments. But when it comes to cash, access and liquidity are very important. How much you hold depends on your risk tolerance and your investment objectives, but everyone can benefit from a cash cushion to help stave off impulsive selling in shaky markets or help pay for unexpected expenses.
BONUS FACT: Cash is covered.
Cash holdings are generally protected under SIPC or FDIC coverage, but there’s a difference between the two. The Securities Investor Protection Corporation (SIPC) protects cash and investments in a brokerage account, in case the financial services firm folds or cannot conduct business, and cash or securities are missing. Its aim is to replace the value of the investment that was held with the broker/dealer, but it doesn’t protect against market loss. The Federal Deposit Insurance Corporation (FDIC) protects bank deposits, including interest, up to $250,000 per account holder, per account type, per bank. FDIC coverage does not cover stocks and bonds.
Progress, Not Perfection
There’s a reason investing pros don’t recommend stuffing the proverbial mattress with cash. Holding too much cash for too long could mean missing out on stronger performance from other asset classes or losing buying power to inflation. Ask your CFP® Practitioner to help you optimize your payable, on-demand cash level so you gain low-risk, high-liquidity flexibility to help you make progress toward your long-term goals. Stay focused and plan accordingly.
Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Asset allocation and diversification do not ensure a profit or protect against a loss. U.S. Treasury securities are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. Certificates of deposit offer FDIC insurance and a fixed rate of return. The market value of fixed income securities may be affected by several risks including interest rate risk, default or credit risk, and liquidity risk.
This material is being provided for informational purposes only and has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Any information should not be deemed a recommendation to buy, hold, or sell any security. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risk including the possible loss of capital. Past performance may not be indicative of future results. The opinions expressed are those of the writer May 13, 2020, but not necessarily those of Raymond James and Associates, and are subject to change at any time based on market conditions and other factors. “Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.” This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239–389-1041, email firstname.lastname@example.org. Website: www.raymondjames.com/Darcie.