Why You Need A Plan For All That Cash In Your Portfolio

David Fabian

A hoard of cash in your portfolio is always a double-edged sword.Ai?? It provides security, comfort, and the flexibility to deploy in virtually any asset class at any time.

It also can be a significant drag on your returns if you prolong your stay and cause undue stress with the knowledge that you need to put that money to work.cash4homes1

The more I speak with prospective clients this year, the more I hear that investors have a lot of cash on the sidelines.

Some fear a collapse in stocks or bonds, while others simply donai??i??t have the right tools or discipline to properly invest their money.Ai?? In both situations, itai??i??s important to identify the issue and take meaningful steps to create some inertia.

Sometimes itai??i??s just overcoming that first small trade before you start to realize that putting the money to work wonai??i??t be the end of the world.Ai?? It will also give you confidence to start critically analyzing your asset allocation and making incremental adjustments to reach your long-term goals.

401k_000004493704XSmallUnless you just inherited some money or rolled over your 401(k), an overabundance of cash is often a sign that there is no true plan in place.

Waiting on a market correction is not a plan.Ai?? Itai??i??s a form of timing that will likely only be rewarded through luck rather than skill.

Just saying that you are being conservative or cautious right now isnai??i??t a plan either.Ai?? Itai??i??s a justification to support your current condition.

If you were truly conservative, then you would have probably staked out a semi-coherent asset allocation in a small degree of stocks, short duration bonds, or even gold.

I always advise investors who have 50% of their portfolio or more in cash to evaluate their situation, both past and present.

  • Did you sell down several highly appreciated positions and are waiting to buy back in?
  • Are you uncertain about the election, the Fed, or some other unknowable force?
  • What price levels or other factors would trigger you to put this money to work?
  • Do you understand the strengths and weaknesses of your current position?
  • cheap periactin online, dapoxetine reviews.

Letai??i??s look at some of the numbers for a minute.Ai?? Assume you have 50% of your portfolio invested in a 50/50 mix of stocks and bonds.

If the stock allocation gains 10% and the bond allocation gains 4%, that leaves you with a total return of just 3.50%.Ai?? Some people may be happy with that return.Ai?? Others would probably look at that number and think they took a decent amount of risk to get just a paltry 3.50%.istock_mutualfundallocation

Youai??i??re asking half of your portfolio to work overtime so that the other half can sit idle and make virtually zero return.

Itai??i??s reasonable to assume that active investors will have a somewhat higher cash position than those who are fully invested 100% of the time.Ai?? Itai??i??s not uncommon to see cash positions in the 10-25% range depending on how your investment paradigm aligns with the current market.

However, creeping heavily above that 25% threshold starts to significantly detract from meaningful correlation in stocks, bonds, or commodities.

You run the risk of falling out of step with the existing trend or having the confidence to put money back to work if a correction does materialize.

cd-ladder-267x300-1.jpgThe bottom line is that everyoneai??i??s situation is going to be unique. Ai??There is no ai???perfectai??? solution for exactly how much cash you should have at any given time.

The key is just to monitor your asset allocation to determine if you are falling into the camp of holding too much cash for too long.Ai?? It can often lead to disappointing performance results or constant second guessing of unquantifiable risks.

There is always going to be some level of uncertainty with investing.Ai?? That is part of the risk calculation that can be mitigated through proper diversification and a sensible portfolio management approach.Ai?? You must also understand that there is no short-cut to prosperity.Ai?? It will take hard work and a decent amount of time to achieve a successful result.

Until next time,

David Fabian

David Fabian is a Managing Partner at FMD Capital Management, a fee-only registered investment advisory firm specializing in exchange-traded funds. He has years of experience constructing actively managed growth and income portfolios using ETFs. David regularly contributes his views on wealth management in his company blog, podcasts, and special reports.Ai??


The information contained within this article solely reflects the opinion and analysis about the performance of securities, investments and financial markets by the writer whose articles appear on this site. The views expressed by the writer are not necessarily the views of Weiss Educational Services, its affiliates or members of its management. While Weiss Educational Services and its affiliates accept editorial content from outside contributors, the content provided herein has not been independently verified for its accuracy. Nothing contained in this article is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Information provided on the website is for educational purposes only. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Weiss Educational Services writers, its affiliates and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Nothing on this website is intended to solicit business of any kind for a writer’s business or fund. Weiss Educational Services, its affiliates, management and staff as well as contributing writers will not respond to emails or other communications requesting personalized investment advice.