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The Care and Feeding of Cash Balances

4 September 2015 in Investing 101

Hang on to cash for too long and you may lag behind inflation, which has averaged about 2 percent annually over the past century.[1] Depending on the overall economic environment, overexposure to cash might weigh down a portfolio’s returns.

However, if you keep your entire portfolio in the market, you might compromise some of your ability to take advantage of investment opportunities as they arise.

Holding some cash in your account can provide peace of mind during volatile markets and reduce the temptation to panic sell at the bottom.

And during down markets, maintaining a cash balance can preserve capital until you see the next opportunity for upside.

How Much Cash Should You Keep?

Determining how much cash to hold depends on your investment strategy, overall income streams and future liquidity needs.

Beyond what’s needed for living expenses, risk tolerance can influence how much cash people keep in their accounts. Your appetite for risk might change according to movements in economic cycles. Risk tolerance also tends to change with age.

Put Your Cash to Work

Once you’ve determined a target cash allocation, don’t forget to maintain it.

How and when to deploy cash depends on your own personal strategies.

One popular approach to this, dollar cost averaging, involves buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price.[2] This should result in more shares purchased when prices are low, and fewer shares bought when prices are high.

An alternative might set an objective based on the movement of the stock market or a benchmark.

Besides movement in a broader stock market index, you can also set triggers based on economic figures, actions by the U.S. Federal Reserve, the government, or other events.

The overall performance of the market can make the difference between whether having extra cash on hand seem prudent or profligate by contrast. While times of volatility or downturns might merit larger cash positions than bull markets, not having any cash at all can limit one’s ability to take advantage of opportunities as soon as they arise.

Got cash? You can put it to work at when you sign up for a free account at Motif Investing.

[1] Reklaitis, Victor, “Schwab Defends Amount It Parks In Cash In New Robo-Adviser Unit,” MarketWatch, March 10, 2015.

[2] Investopedia, “Dollar-Cost Averaging,” Investopedia.com, 2015.

  1. Jamie
    26 Oct at 2:46 pm

    I just invested some money in the markets this morning and it felt great. I had some cash come into my account recently because one of my investments was called. Now it’s deployed again and hopefully will make me a lot of money. 😉

    Reply

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