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11-01-2014, 03:15 PM
By Barry Ritholtz, Published: December 13
How much cash should there be in your investment portfolios?
When people discuss their investing portfolios, they typically refer to the stocks, bonds, commodities and real estate they hold. The conversation might also include model weightings, tilt toward and away from different asset classes, and rebalancing. What we rarely hear about is cash.
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Back to cash and how much to hold in a portfolio. It really depends on who you are, how you are investing and your investment horizon. A hedge fund manager whose clients demand monthly performance reports has different needs than any individual investors with a 20-year time horizon. The needs of that long-term investor differ markedly from someone who is retiring in three years.
Warren Buffett has patiently held as much as $20 billion to $40 billion in cash. He thinks of cash not just as an “asset class that is returning next to nothing,” but rather as “a call option that can be priced, relative to the ability of cash to buy assets.” He put that to good use during the financial crisis, scooping up deeply discounted bargains.
Most investors lack Buffett’s discipline. When markets are rallying, cash in the portfolio is a drag on performance, returning about zero. The argument I hear for cash in the portfolio is it doesn’t go down during market crashes, and it allows the purchases of cheap assets a la Buffett at attractive prices. But investors rarely can make that buy when markets are crashing. They are simply too scared, lacking the fortitude or the nerve to pull the trigger. Even those who managed to avoid the 2008 crash found themselves stuck with way too much cash in their portfolios as markets recovered. Up more than 150 percent since the 2009 lows, many are wondering what to do.
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The bottom line is this: Cash, in modest increments, has a role in any portfolio. But unless you are Warren Buffett, you should limit it to 2 or 3 percent. Otherwise, you are likely to miss the next bull market. Too many people have already missed this one.
NB: 2 or 3 % ???
What's yours?
How much cash should there be in your investment portfolios?
When people discuss their investing portfolios, they typically refer to the stocks, bonds, commodities and real estate they hold. The conversation might also include model weightings, tilt toward and away from different asset classes, and rebalancing. What we rarely hear about is cash.
///////////////////////////////////////////////////////////////////////////////////////////
Back to cash and how much to hold in a portfolio. It really depends on who you are, how you are investing and your investment horizon. A hedge fund manager whose clients demand monthly performance reports has different needs than any individual investors with a 20-year time horizon. The needs of that long-term investor differ markedly from someone who is retiring in three years.
Warren Buffett has patiently held as much as $20 billion to $40 billion in cash. He thinks of cash not just as an “asset class that is returning next to nothing,” but rather as “a call option that can be priced, relative to the ability of cash to buy assets.” He put that to good use during the financial crisis, scooping up deeply discounted bargains.
Most investors lack Buffett’s discipline. When markets are rallying, cash in the portfolio is a drag on performance, returning about zero. The argument I hear for cash in the portfolio is it doesn’t go down during market crashes, and it allows the purchases of cheap assets a la Buffett at attractive prices. But investors rarely can make that buy when markets are crashing. They are simply too scared, lacking the fortitude or the nerve to pull the trigger. Even those who managed to avoid the 2008 crash found themselves stuck with way too much cash in their portfolios as markets recovered. Up more than 150 percent since the 2009 lows, many are wondering what to do.
//////////////////////////////////////////////////////////////
The bottom line is this: Cash, in modest increments, has a role in any portfolio. But unless you are Warren Buffett, you should limit it to 2 or 3 percent. Otherwise, you are likely to miss the next bull market. Too many people have already missed this one.
NB: 2 or 3 % ???
What's yours?
WB:-
1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.
Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.
NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.
Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.
NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
