The myth
In the financial part of your life, cash is inarguably good to have. However, there are various things that you could do with it, including keeping it in the bank, using it to open a business, and so many more.
Allocating some money for investing purposes offers several benefits, ranging from being ready for new opportunities to allowing you to follow your investing strategy. That’s why many people believe that you should always keep cash in your portfolio.
The reality
Having cash in your portfolio means that this amount is already allocated for investing. You won’t be taking from it to go shopping or to pay for your rent or bills (since you’ll already have included these in your budget).
But what can you do with this money? Well, one option is to hold on to it while you look for good investing opportunities. Since such chances are often time-sensitive, having cash that you can immediately deploy allows you to react quickly, and without needing to do things like pull money out from other sources.
This cash can also allow you to easily follow your investing strategy. If you’re doing peso-cost averaging or value averaging, you’ll be adding money to your investments regularly, and this gets easier if you have the right amount ready.
If you’re looking at keeping your portfolio within a certain volatility, cash can help balance out investments whose value may change faster or by a larger amount, such as stocks.
For example, when the stock market falls 20%, a pure-equities portfolio would also dip by the same amount. In comparison, a portfolio containing 80% stocks and 20% cash would lose only 16% of its value in the same situation.
The verdict: True.
There are many advantages and no obvious drawbacks to having cash in your portfolio, so this could be a good habit for your investing journey.
You might find yourself tempted to put all your allocated money into investment products right away. However, you could manage overall volatility and also be ready for good opportunities that come your way by holding on to some cash instead.
One thing to remember: If you find yourself using the cash component of your portfolio, you should try to replenish it as soon as you can. That way, you’re likely to keep enjoying the benefits.
