PC-ES Cash in Your Portfolio PC1332-Print

INVESTMENT STRATEGY

CASH IN YOUR PORTFOLIO

Understanding the Role of Cash in Your Portfolio

It’s easy to understand why investors may be wary of stocks. The stock market has suffered two major pullbacks in recent memory: January 2000 to July 2002 and December 2007 to June 2009. Since the Great Recession officially ended in 2009, the stock market has continued to reach record highs. Despite the run-up in stocks, people have actually been adding to their cash balances, regardless of their age or amount of wealth. Why is this happening? Chalk it up to fear. The fear of another market correction. Or the fear of making the wrong decision at the wrong time. Although cash may feel safe, you can actually lose purchasing power over the long term after accounting for inflation and taxes.

Whether you are keeping money in cash while waiting for opportunities to enter the market, or out of simple fear of the investing climate, holding too much cash can be costly. If you’re invested for the long term, returns on cash probably won’t keep up with the alternatives. ROLES OF CASH Having a better understanding of the role cash plays in your portfolio is critical in helping you reach your financial goals. 1. LIQUIDITY Apart from day-to-day expenses, the need for liquidity generally falls into two categories:   Emergencies (e.g., health expenses, job loss, etc.)   Known obligations or likely expenses in the next one to three years Liquidity is extremely important here – don’t invest money reserved for near-term obligations in the stock market. Instead, keep it in cash, cash investments, or shorter- term investments with minimal principal risk between now and when you need to spend the money. For retirees who may have special liquidity needs, such as increasing medical costs, it may make sense to set aside some money to cover unexpected expenses and limit the potential need to sell from the portfolio at an inopportune time. 2. FLEXIBILITY Having some percentage of your portfolio in cash can allow you to take advantage of investment opportunities as they arise. A cash allocation may come in handy if you wish to overweight or underweight certain asset classes in your portfolio based on your outlook for the markets. In addition, a cash allocation can provide flexibility when it’s time to rebalance your portfolio and/or pay investment fees. Give yourself a firm deadline for reinvesting the money because people who set aside cash to invest opportunistically widely report never making the decision to get back into the market.

RETIREMENT CONSIDERATIONS Market crashes and their

aftermaths can cause investors to become too conservative or even to abandon stocks altogether. Those approaching or in retirement can be especially susceptible to this reaction. Investors may wish to reduce some of the equity risk inside their portfolio during retirement. A portfolio that is too conservative, however, may leave an individual without the financial assets needed to support the lifestyle he or she envisioned, especially given the effects of inflation. With longer life spans, a portfolio may need to last 20 or more years in retirement.

Wealth | Investments | Planning Commerce Trust Company

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