Category: Asset Allocation

What % of my portfolio should I be holding in cash?

Posted by admin Jun 24, 2009 No Comments »

In normal circumstances (remember them?), the goal would be to hold as little in cash as possible. The obvious reason is that you will not even beat inflation with your money tied up in savings/checking/money market account. Allocation to cash in this case would be close to 0%.

So what about abnormal times? I believe its better to invest as much as possible in assets that not only will help you keep up with inflation but also achieve your long-term goals.

Now, if you have looked at your investment choices and figured that you can reduce allocation to risky assets without seriously jeopardizing your long-term goals, then you could allocate the retrenched assets to cash.

It is my own estimation that if you distributed your assets with % allocation to each risky class at the lower end (barely enough to meet your long-term goals) then you may have 0-30% left over for cash.

Overweight cash given the current market volatility?

Posted by admin Jun 23, 2009 6 Comments »

Q: Is it wise to overweight cash given the current market volatility now?

A: I don’t think there is a “right” answer or a one size fits all solution. I believe that the answer to this question lies in each individual’s circumstances.

There are two main things to consider when deciding if you should hold a big chunk of your portfolio in cash or not.

First is your short-term spending requirement. If you have a big expense coming up within the next 12 months and you don’t want any kind of uncertainity in meeting that expense, then you should go ahead and keep that amount in cash. Otherwise, allocate cash to assets that are in line with your long-term objectives or those that can take advantage of current market displacement.

Second is your investment time horizon. If you are investing for long term then short-term volatility should not affect your long term portfolio asset allocations. The long-term investment strategy is designed to meet individual’s long-term goals and not focus on short term changes. The fact is that most of the people need to meet their retirement expenses and the primary goal is to meet those requirements. There is a huge risk that overweighing cash (considered to be safe) will result in that person not being able to meet those retirement goals.

I do see people getting scared of recent “increased” volatility in the stock market and pulling back from it, but I highly doubt that the recent choppiness in the market has materially increased the long-term volatility of the stocks.

In summary, its my belief that it would be appropriate to keep assets in cash if you need them in immediate future, otherwise investing them for the long-term according to your risk/return appetite would be a better approach.