By Kent Lucas, Editor, Safe Haven Investor, taipanpublishinggroup.com
Note From Editor Sara Nunnally: This week’s guest editorial comes from Kent Lucas, editor of Safe Haven Investor. I feel that Smart Investing Daily has a natural connection with Safe Haven Investor. While we bring you new investing ideas and break down complex investing strategies to help you make better financial decisions, Kent’s service is helping investors secure their wealth with tried and true methods that every investor — no matter how savvy — should be employing.
Kent‘s article is one of those methods. We’ve consistently told you that a diverse portfolio is a healthy portfolio, and diversity means holding cash.
But as every investor’s portfolio is different, it’s hard to say just how much of your portfolio should be in cash. Kent helps you determine what’s right for you, so read on…
How to Be a Better Investor: How Much Cash Should I Have in 2011?
All asset allocation strategies should include cash as a required asset for an investor’s portfolio.
When I say cash, I’m referring to accessible money that is safe and is not at risk of losing its value. Stocks, bonds, real estate and commodities all are asset classes that can lose value — we know that all too well. But cash is like a rock for your investment portfolio. No matter what happens, that $5,000, $50,000 or $500,000 part of your portfolio that is in cash is safe. Very safe.
Last year, when the markets were the most volatile, I made it clear that you should own cash, in two mid-year alerts dated May 28 and June 4, 2010. They’re definitely worth a close look. Here’s one excerpt describing the value of cash:
And just as holding cash can be a savior and a major source of wealth preservation when markets are tumbling; cash is also a great source of liquidity. As I said last week, cash does more than protect wealth; it allows us to keep some “powder dry”; to be able to buy some attractive ideas out there, especially if markets fall any further.
— Safe Haven Investor Alert, May 28, 2010
How you “hold cash” is up to you. Your cash could be under a mattress or in a coffee can like my father used to do. More common instruments include U.S. government T-bills, bank certificates of deposits (CDs), commercial paper or other cash-based investment vehicles that are offered by your bank, broker or a mutual fund company.
You should keep a certain amount cash available for buying opportunities; say, after a correction that we probably will have this year. If so, then you should have your cash linked to your trading account.
Unfortunately, in today’s market they’re all earning about the same amount of interest — between zero and 1%.
In fact, my bank called me last week, telling me I had to come in for a talk about account changes. Well, the only account changes I’ve received of late pertain to higher fees or higher balance requirements, but I told the guy I would stop in soon. He wanted just five minutes of my time.
When I was in the neighborhood I wandered in. I had to wait more than five minutes to see him, so he already spent his five minutes — but I’m not that harsh. But when I did sit down in his cubicle, I reminded him that he asked for five minutes of my time but I’d give him seven minutes.
Well, he wanted to tell me about a new deal — that if I added $10,000 dollars to a new or existing account, I’d get a $100 bonus in addition to earning 0.02% annual interest. At first, I laughed to myself and smirked, until I realized that $100 equates to 1%, which, unfortunately, is not bad in this environment.
And that’s OK, because having cash should make us feel safer. We have money that we can’t lose. We have funds for a rainy day, not tied up in a losing investment.
(By the way, I may be a guest editor for Smart Investing Daily, but regular editors Sara Nunnally and Jared Levy are always simplifying the market with their easy-to-understand investment articles.)
How Much Cash Is Right?
So how much cash should you hold for 2011? Of course, it varies by individual based on several factors. Your risk tolerance, your age, how much of your nest egg you have and will need, and your health, just to name a few variables. But those variables matter more when thinking of your ideal mix between stocks, bonds and alternative investments (commodities, hedge funds and real estate, for example).
For your cash allocation, it’s not that complicated. As I mentioned above, cash is more important for capital preservation, liquidity and making sure you have some money available for any attractive buying opportunities.
Five to fifteen percent of your total investable assets makes sense for most individuals with several years until retirement. You should tend toward the low end of that range today, for the first part of 2011, because I’m bullish on the stock market. Specifically, you should have more of your money put to work in a rising market.
Later in the year, we might get more conservative and that cash portion could move higher, say toward 10% to 15%.
Some of you might be wondering about inflation and how it might eat into your real cash balance. That’s a good question. But don’t view cash as an inflation-fighting asset. It’s only a small (but important) part of your total financial portfolio used for other purposes. Not to generate excessive returns. Investing in stocks or owning the right bonds such as Treasury inflation-protected securities (TIPS) will fight any inflation.
Sleep Well
Understanding the importance of cash and why you hold the amount that you do will allay some of your fears of investing in this delicate market. Cash is a great cushion and a critical balance to the rest of your portfolio.
You might not have your cash under the mattress anymore. But having cash safely put away somewhere should allow for a good night’s sleep.
*Editor’s Note: One of Kent’s important goals for Safe Haven Investor in 2011 is to make you feel safer and more confident about investing. His service is a must-have for anyone looking to make their portfolio as secure as possible. Follow this link to learn more about Safe Haven Investor.
About the Author
Kent Lucas is the Editor of Taipan’s Safe Haven Investor and Global Income Generator. He has a Bachelor’s Degree in Economics from Harvard University, his Master’s from Stanford University and over 20 years of financial and business experience. His background includes seven years as a research analyst and portfolio manager for a leading investment management firm. He has also actively managed $1 billion worth of equity assets, with particular attention to multi-industrial companies along with auto, construction and farm equipment-related companies. Kent has also worked in leading financial institutions’ divisions including tax-exempt derivatives, corporate trust, and equities sales and trading.
As the Editor of Taipan’s Safe Haven Investor, Kent uses his stock market investment system and the 13F Disbursement Plan to uncover the most profitable long-term investment opportunities found in the SEC 13F Disclosure Form. For Global Income Generator, Kent hand-picks undervalued stocks from countries impacted by current events or technology that lead to potential rises in share price.
