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How cash fits into your portfolio

With expectations that the Federal Reserve is close to bumping up historically low interest rates, Brian Kilb explains, investors can afford to consider holding a little more cash than usual both to cover short-term spending needs and to fund possible investment opportunities. Brian spoke with Joel Dresang in a Money Talk Video.

Joel Dresang: Brian, we’re hearing more about cash these days. The American Association of Individual Investors found that for three months in a row, investors have been putting more of their allocations toward cash. What’s going on?

Brian Kilb: Well, Joel, a number of different things. We’re in a post-financial crisis world still, eight years later. People have paid down debt. People are starting to save a little bit more. And yet there’s not a lot of confidence for many retail investors to plow that money into the stock market, so you’re finding some accumulation of cash.

Joel: So, what kind of a role should cash be playing in an individual’s portfolio?

Brian: It can serve a couple of different purposes, but primarily it’s just a source of liquidity. I think anytime somebody needs cash, for whatever reason in the short term, you don’t want to mess around with the risk implied in the stock market or even the little bit of volatility that may be in bonds. So, have those short-term spending needs covered in cash.

Also, I think when you’re looking from an investment standpoint to perhaps dive into some riskier assets, it’s not inappropriate to have a little bit of cash there to be at the ready when that opportunity arises.

Joel: On one of our podcasts recently, you were saying that the environment might be a little bit different now, and people should regard cash differently than they have in the past.

Brian: Yes. Historically, it’s very different than it’s been. Interest rates are the lowest they’ve been in 30 years. Because of that, as we head toward a rising-rate environment, please remember that when rates rise, the price of your bonds can go down. You could be in a situation with your bond portfolio where you actually have negative returns for a short period of time.

Joel: From what I’m hearing, cash is really sort of a short-term consideration.

Brian: Yes. I think, Joel, there’s a safe part of your portfolio and a more aggressive growth-oriented part of your portfolio. To the degree that cash is in the safe side of things, you have to weigh the situation where you’re getting paid virtually nothing in cash against the potential of making a little bit in bonds. So, we’re still trying to maximize the earnings, even as we focus on it being safe money.

Joel: Are there guidelines for how much of my portfolio should be in cash?

Brian: I think it’s a comfort level for a lot of people. Back in the day, we had the old rule of thumb that you might need six months’ worth of liquidity in your bank account to cover any change in circumstances. I don’t know that that holds true anymore. Most of the assets in your portfolio can be liquidated and in your pocket in three- to five business days.

So the need for liquidity isn’t exactly as paramount as it was years and years ago. To the degree that you have a bond portfolio that provides safety, and to the degree that you can access that quickly, have enough cash in your portfolio to cover super short-term liquidity needs, and that should be sufficient.

Brian Kilb is executive vice president and chief operating officer of Landaas & Company.

Joel Dresang is vice president-communications at Landaas & Company.

Money Talk Video by Peter May
(initially posted Aug. 7, 2015)

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