Here’s what the experts say…
It’s been said that “cash is king,” but what exactly does that mean for your investment portfolio? Most financial professionals will advise you to have a certain amount of cash on hand for emergencies, but, as a long-term investment strategy, cash is never a good idea. However, that does not mean that cash does not have a role to play in your investment portfolio.
Traditionally, cash investments do not yield high results, and of course, isn’t that what every investor wants for his or her portfolio? But high returns alone, on potentially riskier investments, is not enough to ensure a future of financial stability. That is where cash comes in. Cash brings short-term options to the table, which can actually help you to achieve your long-term goals – if handled correctly.
Smart investors do it all the time. But this does require knowledge, and a little finesse in identifying the right opportunities. Most investors understand how to use cash, or more accurately, “cash equivalents” as a hedge against economic downturns.
How Cash Assets Play a Role in Your Investment Portfolio
These kinds of cash investments serve two purposes. One, they offer a bit of protection against future expected downturns. In addition, they also add value that will put your portfolio in a position to buy more equities when the markets inevitably rebound, and attractive investment opportunities again present themselves.
In this way cash serves as a position in your portfolio. It’s not merely the passive safety component as many investors think it is. The thing about using cash this way, is that it does take a considerable amount of timing and market savvy. If you keep waiting for certain opportunities for very long, it will be a drag on the returns, as any cash allocation will have a long-term opportunity cost.
Marketing legend Gary Vaynerchuck famously speaks of a time when he was given a chance to invest in Uber, yet couldn’t due to purchasing an apartment of great expense. Gary often advises young entrepreneurs that cash is opportunity.
So you must be very careful with cash allocations. If this is not something you think you can handle on your own, talk to a qualified financial advisor.
Do you use cash as part of your investment portfolio, if so how? Please reply using the comments below.