Therefore, a balance needs to be maintained while building a portfolio for oneself.
Benefits of Having Cash
Let us first have a look at some of the benefits of having cash in hand
1) Liquidity Reserve
Cash in hand acts as a reserve for liquidity when the market is not performing well. It is a part of financial wisdom to withdraw funds from assets when the economic conditions are bad.
Under such conditions, it becomes difficult to liquidate certain assets and, therefore, a good idea to have some cash to meet the daily requirements.
Benjamin Graham has also said that if portfolio management is done smartly, an investor will never have a shortage of funds to make it through the darkest times.
2) Funds for Tapping on the Opportunities
Many a time, economic conditions are like that certain asset classes become extremely cheap and are available at throwaway prices.
One should always have some cash when such opportunities arise in the market.
This is one important use of cash. It provides a sense of security psychologically. Even if the times are bad, a good bank balance provides a lot of support and confidence to individuals.
How Much Cash to Hold
Having said about the benefits of cash, an important question arises as to how much cash one should have in one’s portfolio. Too much cash is bad because of the opportunity costs.
This means that one loses on the profits that one might have earned if he/she had invested that cash in some good performing assets.
Most of the investors say that one should have at least 5% of one’s capital dedicated to cash. On the other hand, other conservative investors prefer this amount to be somewhere between 10% – 20%. There is no one correct figure that would be applicable to all.
It is a subjective matter, and it depends on many individual factors like age group, stable income, risk appetite, financial obligations, etc.
For example, a retired person or nearing retiring would like to have more cash in hand as compared to a young salaried individual with less financial obligations.
In any case, one must have an emergency fund that can be withdrawn anytime in order to be prepared for any kind of unforeseen expenditure.
Therefore, it is highly recommended to keep liquid assets while building a portfolio.
Having cash in hand as one part of a portfolio of different kinds of assets is one financially wise decision.
Cash is needed for any emergencies, for taking advantage of a financial opportunity when some asset is available at relatively cheap rates. Moreover, it gives a sense of confidence to an individual.
Having said that, this is also true that having too much cash in hand prevents capital from growing at a good pace. This is because of the very low-interest rates offered by banks these days.
And this is the reason why building a portfolio of different asset classes is recommended for all.
Depending on various factors, the amount of cash that one should keep for himself/herself varies. The ideal percentage of cash in hand can vary between the range of 5% – 20%.
The decision about it needs to be taken carefully and should be maintained strictly at all times.
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