Cash is King (Always)
How much cash should you keep in your portfolio? If you have too little you will be forced to sell securities in order to meet your immediate or sudden cashflow needs. If you have too little you won’t have any dry powder to capitalize on the next opportunity or market downturn. If you have too much your subject to the eroding effects of inflation and missing out on the general ebb and flow of the upward market trend.
I believe you need to have a good solid cash cushion and the ancillary benefits it provides – both tangible and psychological will enable you to realize better overall performance. Let me outline the benefits of cash first, and then we’ll end with a recommended percentage allocation you can target.
Cash can yield more than short term bonds
Returns on cash are competitive, if not better, than short term bonds when you consider the yield to maturity. Yield to maturity tells you the expected return of the bonds considering the current coupon and value of the bond at the maturity date. Read more about YTM here. You also want to take into account the fees paid for short term bond funds which will eat into returns. All considered, you’re not missing out.
US short term bond fund | Fees | Yield to Maturity |
MER = 0.15% MER = 0.05% | 0.17% 0.40% | |
Canadian short term bond fund | Fees | Yield to Maturity |
MER = 0.10% MER = 0.17% | 0.67% 0.60% |
US High Interest Savings Acct | Fees | Annual Interest Rate |
0.00% & no min. balance 0.00% & no min. balance | 0.80% 0.80% | |
Canadian HISA | Fees | Annual Interest Rate |
0.00% & no min. balance 0.00% & no min. balance | 0.90% 1.70% |
A new emerging trend are HISA ETF’s – exciting and we’ll review this in a future article.
Cash offers true stability.
During a market pull back or crash, cash will stand stable and immovable. Giving you the opportunity to pounce and take advantage of lower priced equities. Consider that during the craziness of March 2020 not even short term bonds were safe and each took a dip. Cash stood steady and didn’t budge an inch. So sleep sound at night knowing a portion of your portfolio is an immovable rock.
Cash enables your stock portfolio to work and build wealth
Stocks are where the performance is – no question about it. You need them to build your wealth, fight inflation, and give you that performance you need. The drawback to stocks is they need time and you need to be patient. Cash can be that cushion you need to provide emergency funds so you can leave your stocks alone, or add to them when an opportunity presents. Cash is the great enabler of your portfolio – it gives your stocks time to grow, stabilizes returns, and allows you to sleep at night.
The Professionals Do It
If I have not convinced you yet – maybe this will: some of the best fund managers, professional investors, and wealthy clients have substantial cash reserves.
| Cash | Date |
Berkshire Hathaway (Warren Buffet)
Tweedy Browne Global Value Fund
2019 Capgemini World Wealth report of Clients with 1M in assets
| 137 Billion
13.82%
28% | March 31, 2020
April 13, 2020
2019 Study |
Why? They want the safety and security offered by cash plus the ability to look for new assets and opportunities to build on their passive income or portfolio value.
How Much Cash?
Let’s keep this simple – want it to be no less than 7% but no higher than 14%.
The only snag is the 6 months living expenses compared to your portfolio value. Keep your target cash level at 14% until you have those 6 months saved away. Then manage your cash so you’re always between 7% and 14% but never going lower than 6 months of expenses.
