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The Role Cash Serves in a Portfolio

Cash in a portfolio should have a specific role in a portfolio. We see cash as fitting in one of these three categories:

  • Liquidity provisions: this is to cover expenses and emergency funds.  This includes money to pay for the mortgage, the unexpected new roof, basic living expenses, etc.
  • Defensive position: Cash in this pot acts as a cushion against stock/bond volatility.
  • Offensive position:  In some cases, we recommend keeping higher levels of cash until trends in the market change.  In this case, we maintain cash reserves for future investments.

How much cash in each category depends on your expense pattern, your goals and risk tolerance.

Contact us today if you’re interested in making your cash work harder.


The Risks of Having High Levels of Cash

Investors have been keeping record high levels of cash in their investment accounts and savings accounts.  It’s a logical place to park money for a while. It’s relatively safe, readily accessible and a very common practice.  Unfortunately, many investors are moving to cash without a strategy guiding them.  So what’s the problem with having a high level of cash?

1) Your cash is earning next to nothing. The government is discouraging savings by keeping interest rates low.  They are doing this to push investors into the market and to invest in stocks and bonds.

2) Low interest rates will likely continue. Janet Yellen, the incoming Fed Chair has signaled her intentions to maintain similar policies as her predecessor.  These poor savings rates could continue for the next few years.

3)  Inflation will slowly eat away at your purchasing power.  This slow, ever-present issue catches many investors off guard.

4)  In addition to inflation risk, you also face opportunity risk.  Many investors sat in cash during the last few years, while the markets hit all time highs.  That’s a missed opportunity.

Bottom line: The government is punishing you for saving, and rewarding you for investing.

You need to develop a strategy for your cash. It’s important to treat cash as an asset class.  It needs to serve a specific role in the portfolio.

Contact us today if you’re interested in making your cash work harder.


Have you shopped at Target lately?

Target announced today (article) that it was the victim of what may prove to be the largest data theft ever recorded. If you shopped at a Target in the last few weeks, your personal credit card or debit card (not just the Target-branded cards) may have been one of more than 40 million credit cards that were compromised. 40 million is also the population of California!

If you suspect you’re in that unfortunate group, you can check to see if there is any unusual activity on your account by going on line or calling customer service for your credit card. You can protest any fraudulent charges, and the credit card company will probably waive the charges after a brief investigation. Keep monitoring your account for the next month or so. If you’re suspicious and want to be extra cautious, ask your credit card company to freeze your account, and ask for a new card.

Identity theft has now affected one in 14 Americans, and losses from identity theft exceeded $47 billion in the last year, far more than all other property crimes combined.

Have you ever been affected? Send us an email with your story and we can post your experience, confidentially of course.