Shares are by far my favourite investment class, but should cash and bonds be part of your investment strategy too?
Many investment managers use cash to as a way to protect the portfolio value against market declines and it also provides ammunition for investment managers to buy shares cheaper when share prices drop.
Bonds are also seen as a defensive asset that can be used to protect against share market declines and interest rate cuts. Two of the most commonly used bond exchange-traded funds (ETFs) in Australia are Vanguard Australian Fixed Interest Index ETF (ASX: VAF) and Vanguard Australian Government Bond Index ETF (ASX: VGB).
Over the ultra-long-term it has been proven that shares are the best performing asset class. iShares S&P 500 ETF (ASX: IVV) has been an exceptionally strong investment since the end of the GFC.
If you're deciding to own cash or bonds as part of your investments you might be saying that you think a market crash is coming, or that you can time the market. I believe that would be a mistake. No-one can know, even if the indications are there.
Many 'experts' have been saying over the past decade that another crash is coming. We're certainly closer to the next recession than we were five years ago, but there's nothing to say it will happen next month or next year. The only reason I'd suggest having cash or bonds in your portfolio is a good idea is if you want to reduce overall portfolio volatility. However, I don't think we should think of volatility as risk per se. It can actually be a good opportunity.
But, I do think that everyone should keep a solid amount of money on the side as an emergency fund. How much? At least $1,000. Maybe between three months to six months of living expenses. But I don't think of the emergency fund as an investment.
Foolish takeaway
Cash and bonds certainly have their place in the financial world, but in terms of generating returns I think it's best just to have your investment money in your best ideas. Keep enough on the side to let you sleep easily at night.
