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Is it time to start holding more cash?

“Cash is king” is one of the oldest money phrases out there, but it’s a very good one. Over the long-term cash is seen as the worst investment compared to assets like shares and property.

However, on the flip side it is very valuable in the short-term. When assets are going cheap, you’ll really want to have some cash then. When times are getting tough you’ll want your businesses to have a solid cash balance (and not a lot of debt). If you lose your job you’ll want to have some cash saved up for a rainy day.

So, is it time to start holding more cash?

Some of Australia’s most successful investment managers seem to think so. Wilson Asset Management’s WAM Research Limited (ASX: WAX) and the Magellan Global Trust (ASX: MGG) run by Magellan Financial Group Ltd (ASX: MFG) are both holding more than 22.5% of their portfolios in cash.

If you had been sitting in cash for the last three years waiting for a crash then you would have missed out on some good gains, but cash is useful at the right time.

However, I am now thinking that it would be prudent to start building up a cash pile so that I can jump on any opportunities that may arise in a severe market correction. With this strategy the main thing to remember is that it’s important to be brave and jump on the opportunities when they present themselves.

Foolish takeaway

I’m certainly not advocating a 50% cash position or even a 25% one, but it could be prudent to hold, say, a 5% cash position or 10% cash position if your usual method is just to invest all your spare cash when you get it. A recession happens roughly every decade and we are about due for one. It would be annoying to miss out on good-value growth shares.

When the time comes, I think you'll want to have the cash handy to buy shares of these exciting growth stocks.

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Motley Fool contributor Tristan Harrison owns shares of MAGLOBTRST UNITS and WAM Research Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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