Once you’ve paid off your high-interest debt and you have a decent amount of cash set aside for emergencies, it’s good to put all new cash you save towards investments.
However, one question that needs to be considered is how much cash should you hold in your portfolio? Should you hold any cash at all?
Over the long-term it’s proven that cash will provide the smallest returns compared to shares and property, particularly with the current bank interest rates being so low at 3% at best.
However, when asset prices go down I bet you want to have some cash on hand to buy some beaten-up shares at good prices. With the global asset prices being so high, it could make sense to hold some cash.
That’s the problem with investing, you have no idea what share prices are going to do next.
Depending on your share parcel buying size, it might be a good idea to always have at least one purchase amount ready to go. Whether that’s $500, $1,000 or $10,000. I sure find it annoying when there’s a stock that has dropped and I don’t have any money to invest.
Some professional have large amounts of cash on hand, perhaps above 20% of the portfolio, like Magellan Global Trust (ASX: MGG) and WAM Research Limited (ASX: WAX). This provides downside protection and also gives opportunities to snap up bargains.
Other investors, like NAOS Absolute Opportunities Co Ltd (ASX: NAC), don’t have much cash but own stocks that have good cash positions on the balance sheet.
Each investor needs to decide how much cash they want to hold considering their age and risk tolerance.
The riskier you feel the market is, the more understandable it would be to hold a bit more cash in your portfolio. However, it’s a fool’s (small f) game to try to predict when a market meltdown will occur. Some studies have shown that the best returns are generated in the lead up to a market dip.
If you are worried about the market and your portfolio, you should consider owning this top stock, its profit is likely to grow in recession times.
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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.