Best of the Week
Most Popular
1.UK General Election BBC Exit Polls Forecast Accuracy - Nadeem_Walayat
2.UK General Election 2017 Seats Final Forecast, Labour, Conservative Lib-Dem, SNP - Nadeem_Walayat
3.UK General Election 2017 Forecast: Conservative 358, Labour 212 Seats - Nadeem_Walayat
4.Theresa May to Resign, Fatal Error Was to Believe Worthless Opinion Polls! - Nadeem_Walayat
5.UK House Prices Forecast General Election 2017 Conservative Seats Result - Nadeem_Walayat
6.The Stock Market Crash of 2017 That Never Was But Could it Still Come to Pass? - Sol_Palha
7.[TRADE ALERT] Write This Gold Stock Ticker Down Now - WallStreetNation
8.UK General Election Results Map 2017 vs 2015 vs Opinion Polls - Nadeem_Walayat
9.Orphaned Poisoned Waters,Severe Chronic Water Shortage Imminent - Richard_Mills
10.How The Smart Money Is Playing The Lithium Boom - OilPrice_Com
Last 7 days
Gold Back With A Vengeance As Bitcoin Bubble Bursts - 26th Jun 17
Crude Oil Trade & Nasdaq QQQ Update - 26th Jun 17
Gold and Silver Ongoing Consolidation May End Soon - 25th Jun 17
Dollar May Become “Local Currency of the U.S.” Only - 25th Jun 17
Sheffield Great Flood of 2007, 10 Years On - Unique Timeline of What Happened - 24th Jun 17
US Stock Market Correction Could be Underway - 24th Jun 17
Proof That This Economic Recovery Narrative is False - 24th Jun 17
Best Cash ISA for Soaring Inflation, Kent Reliance Illustrates the Great ISA Rip Off - 24th Jun 17
Gold Summer Doldrums - 23rd Jun 17
Hedgers Net Short the Euro, US Market Rotates; 2 Horsemen Set to Ride? - 23rd Jun 17
Nether Edge By Election Result: Labour Win Sheffield City Council Seat by 132 Votes - 23rd Jun 17
Grenfell Fire: 600 of 4000 Tower Blocks Ticking Time Bomb Death Traps! - 22nd Jun 17
Car Sales About To Go Over The Cliff - 22nd Jun 17
LOG 0.786 support in CRUDE OIL and COCOA - 22nd Jun 17
More Stock Market Fluctuations Along New Record Highs - 22nd Jun 17
Understanding true money, Pound Sterling must make another historic low, Euro and Gold outlook! - 22nd Jun 17
Green Party Could Control Sheffield City Council Balance of Power Local Election 2018 - 22nd Jun 17
Ratio Combo Charts : Hidden Clues to the Gold Market Puzzle - 22nd Jun 17
Steem Hard Forks & Now People Are Making Even More Money On Blockchain Steemit - 22nd Jun 17
4 Steps for Comparing Binary Options Providers - 22nd Jun 17
Nether Edge & Sharrow By-Election, Will Labour Lose Safe Council Seat, Sheffield? - 21st Jun 17
Stock Market SPX Making New Lows - 21st Jun 17
Your Future Wealth Depends on what You Decide to Keep and Invest in Now - 21st Jun 17
Either Bitcoin Will Fail OR Bitcoin Is A Government Invention Meant To Enslave... - 21st Jun 17
Strength in Gold and Silver Mining Stocks and Its Implications - 21st Jun 17
Inflation is No Longer in Stealth Mode - 21st Jun 17
CRUDE OIL UPDATE- “0.30 risk is cheap for changing implication!” - 20th Jun 17
Crude Oil Verifies Price Breakdown – Or Is It Something More? - 20th Jun 17
Trump Backs ISIS As He Pushes US Onto Brink of World War III With Russia - 20th Jun 17
Most Popular Auto Trading Tools for trading with Stock Markets - 20th Jun 17
GDXJ Gold Stocks Massacre: The Aftermath - 20th Jun 17
Why Walkers Crisps Pay Packet Promotion is RUBBISH! - 20th Jun 17

Market Oracle FREE Newsletter

The MRI 3D Report

Investors How Much Cash Should You Hold?

Portfolio / Investing 2011 Nov 11, 2011 - 07:20 AM GMT

By: Money_Morning

Portfolio

Best Financial Markets Analysis ArticleKeith Fitz-Gerald writes: As you might imagine, I receive a lot of questions from readers around the world and right now the question I'm being asked most frequently is, "How much cash should I be holding?"

There's no right answer, but given the extraordinary times we're living in, I think the more interesting thing to consider is "what to do with it?"


But first things first. Let's talk about how much cash may be appropriate, then address what to do with it.

Traditional Wall Street thinking holds that cash is a drag that actually holds you back. The argument, particularly in a low interest rate environment, is that cash actually produces a negative real return because it really isn't "earning" anything while it burns a hole in your pocket and gradually loses ground to inflation.

I have a problem with this argument in that it's based primarily on the assumption that there's nothing better down the road.

I believe cash is key when it comes to providing the flexibility needed to safeguard wealth or capitalize on new opportunities - even now.

Not to make light of the current situation in Europe or our woes here in the United States, but the way I see things you can either ignore the problems and hope they go away in which case your cash is a dead asset, or you can learn how to deal with the uncertainty and profit from it in which case your cash is an asset.

If you're retired, holding something on the order of two to five years of living expenses is prudent. That way you can plan for regular expenses like insurance, medical bills, a mortgage if you've got one, and investing. Especially investing.

Now, if you're still working and have a regular paycheck, you can take some risks and hold less cash on the assumption that future income will offset the risks associated with a lower cash "buffer" on hand. A generally accepted rule is six months, but I think given today's economy 12-months worth of expenses is more appropriate.

Either way, the goal is the same - to have enough cash on hand that you don't have to spend money you don't want to at an inopportune time nor sell something when you don't want to.

For somebody in my situation, I think having about 20% of my investable assets in cash is about right.

If that strikes you as low in today's markets with all the risks they harbor, bear in mind I also use trailing stops religiously and I'm prepared to go to cash if things roll over. If you aren't disciplined or aren't prepared to be as nimble as the markets require, perhaps a more conservative 40% to 60% is appropriate. Maybe more.

Once you've decided what level of cash is appropriate for your particular situation, you can get to the bigger question of what to actually do with it.

This is where things get really interesting because even cash can be tweaked for better performance.

Bonds can be a Cash Alternative (For Now)
As long as interest rates remain low, core bond funds may make more appropriate "bank" accounts. At the very least, they can make good complements to the usual savings, checking and money market funds most Americans have already established.

Now, I can already sense the snarky e-mails heading this way telling me I have lost my mind or don't understand the risks associated with rising rates.

I haven't. Rising rates will make bonds tumble, and bond funds - with very few exceptions - will lose money.

But consider this: The chronic state of economic misery that we live in now may be with us a while. That's going to help keep interest rates low because the government believes - wrongly I might add - in stimulative economics that don't work and have never worked in recorded history.

More to the point, the U.S. Federal Reserve, for example, has announced that it's going to keep rates near zero through 2013. To me this is a near picture perfect repeat of the "Lost Decade" in Japan, which now is actually entering its third lost decade. We're on the same path.

The uncertainty could drive investors to bonds and actually make rates fall still lower from here, as hard as that is to imagine.

Consider starting with the TCW Core Fixed Income Fund (MUTF: TGFNX), or something similar. The Core Fund has returned 11% annualized over the past three years, according to Kiplinger's Personal Finance Magazine. That's handily beaten the benchmark Barclay's U.S. Aggregate Bond Fund by 3.5%. Dividends are paid monthly and the fund's yield currently stands at 3.59%.

Or, if you're bothered by the concept of holding bonds right now, try the American Century Capital Preservation Fund (MUTF: CPFXX). Started in 1972, CPFXX is one of the most senior and established Treasury-only money market funds in the investment industry. As such, it's an ideal place to stash your cash while waiting for new investment opportunities. It's also worth noting that CPFXX is exempt from state income tax, too.

There are two keys to watch here. First, if the benchmark yield on 10-year Treasuries begins to rise above 2.20% or ratings agencies downgrade U.S. debt, you could reduce your exposure and transfer cash back to a traditional bank account.

Broadening Your Horizons
Something else you may wish to consider is creating a multicurrency basket of cash. This is a common practice in areas outside of the United States. And, it's as much about opportunity as it is about hedging risk.

Something like the EverBank foreign currency CDs or WorldCurrency Access Deposit Accounts may be a great way to start if you don't travel internationally or are not "Swiss" worthy*.

The former offers a mix of currencies in a single CD that helps diversify the risks associated with cash itself. The latter allows you to transfer money between currencies in a single, global deposit account. Both are insured by the Federal Deposit Insurance Corp. (FDIC).

Structurally Sound
Finally, you could elect to buy "structured" products.

These are being marketed aggressively right now and come with their own set of wrinkles, so take the time to understand what you are getting into.

In a nutshell, structured products are essentially annual income generators designed as substitutes for low yielding traditional bank accounts. The yield is usually pegged to underlying stocks or in some cases bonds.

If the underlying portfolio rises, the investor receives a coupon payout equal to that amount. And if the underlying portfolio stays flat or falls, the investor is out a fee of 1% to 3% depending on the individual product.

If held to maturity, many structured products guarantee principal which is a good thing if stocks are headed higher. But if they're not, investors may have to recover their losses before any principal coupons are paid.

Be careful though, all investments involve risk...even cash.

*Special Note of Disclosure: Money Map Press has a promotional relationship with Everbank.

Source : http://moneymorning.com/2011/11/11/how-much-cash-should-you-hold/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive


© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife