Наталья Серова

How much cache should you keep in your portfolio and where should you store it?

Investors often underestimate the importance of having cash in their portfolio and do not know how much money they should keep in their portfolio. Find out more about how much money to keep in your portfolio and in which instruments to keep the cache.

Having cash is necessary for two important components:

  • As a financial cushion.
  • As part of an investment portfolio.

Safety bag

For most people, the absolute minimum level of cash to keep on hand is a contingency fund or airbag that will cover your ongoing expenses for at least six months. An airbag can help you cope with unexpected disasters or surprises without having to sell your assets in a brokerage account. Forcing to sell assets at the wrong time can cause excessive taxes and suboptimal profits - perhaps at a time when you are already in financial distress.

The airbag can be stored in cash and, in addition to rubles, it can also be kept in other protective currencies such as dollars, euros, yuan, etc.

Cash in portfolio

A common sense strategy might be to set aside at least 5% of your portfolio in cash, and many investors choose to keep at least 5% to 15% in cash.

The best investors in history are known for keeping large sums of cash on hand. They know first hand what black swans can happen from time to time - often without warning. In August 2019, Warren Buffett and his firm Berkshire Hathaway held a record $ 122 billion in cash.

In private, wealthy people love to save money too. The published Capgemini World Wealth report for 2019 showed that people with at least $ 1 million in investment assets hold about 28% of their portfolio in cash. If (or when) the economy enters a new recession, these cash reserves will allow these wealthy investors to buy cheap houses, stocks, and other assets.

Crisis Cash

According to statistics, once every 1-2 years the stock market falls by 10-20%, and every 4-5 years there are strong falls of 30-40%. Cash contributes to investor success, even if it seems like it hasn't been doing anything for a long time.

Thus, during crises and corrections, when panic reigns in the markets and securities are sold at a "sale" at a very low price, investors who have postponed cash in their portfolio in advance will be able to buy these sagging assets, which will multiply their capital in the future.

Buffett likes to say that money is like oxygen: everyone needs it and when there is a lot of it, they take it for granted, but in an emergency, it's the only thing that matters.