Broker Check

What is cash?

January 31, 2023

I figured if we are going to talk about the first two parts of the asset allocation recipe (stocks, bonds, cash), then we ought to talk about the final part, cash. This will be much shorter than the first two, though, as the concept of cash is much easier to understand.

When creating a portfolio, you typically have three buckets: stocks, bonds, and cash. A standard portfolio can look like this: 60% stocks, 30% bonds, and 10% cash.

Cash can be utilized in two ways: money sidelined for use at a future date or further preservation of capital. Bonds, though thought of as safer than stocks, and in many ways, they are, still pose risks and still have the chance of going down. Cash only has one risk, maybe two, though the second one is psychological. Inflation is the only real risk to cash. Loss of purchasing power over time, which is topical seeing as how inflation is near 7%. The other risk is fear of missing out (FOMO). If you have your money in cash, it's not invested, and if an investment takes off, you could experience this feeling.

Typically, depending on the client, I'll keep at least 10% in cash. It makes the client and myself feel a little bit better knowing there are some risks taken off of the table. Also, depending on what the market and the economy are doing, I'll sell an underperforming asset or realize some gains in an asset that's done well, and then sit on the cash until another opportunity presents itself.

Now that we've taken care of stocks, bonds, and now, cash, we'll talk about asset allocation best practices, as well as what information is taken into account when creating your portfolio.

Don't hesitate to reach out if you have questions.

All the best!