It's common knowledge that cash produces the worst return over the long-term compared to shares, property and bonds. By long-term I mean a minimum of 10 years.
Generating long-term returns is extremely important because otherwise your money will slowly become worth less over time due to inflation.
Saving all your money in cash is not going to you mega wealthy. At the moment the best savings interest rate offered by banks is somewhere between 2% to 3%, depending on the bank.
But, cash is also extremely useful. During the GFC the value of the big bank shares like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) fell by than 50%. Obviously, the value of cash doesn't fall if there's a stock market crash.
Cash can offer protection for your portfolio so that it doesn't drop as much as it may have. The key part is that to take advantage of damaged share prices you need cash on hand to actually buy more shares.
I'm not advocating that 50% of your portfolio should be cash, but keeping a bit aside in-case there are opportunities could be a good strategy. I think it's telling that some of Australia's best investors are increasing their cash positions at the moment.
For example, WAM Capital Limited (ASX: WAM) increased its cash position to 33.1% at the end of April and Magellan Global Trust (ASX: MGG) had 23% of its portfolio as cash at the end of March.
Foolish takeaway
I believe it is a prudent move to start building up cash at this point in the cycle, although I'm not selling any stock specifically in mind of "timing the market". It's extremely likely that there will be another major market dip at some point – crashes average out to roughly once every 10 years.
