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How Cash Works in Your Portfolio

How Cash Works in Your Portfolio
Cash is more than just the dollar bills in your pocket—it can be a powerful part of your investment portfolio. However, the cash allocation in your portfolio is usually a bit different than the cash in your bank account. Let’s look at what cash means from an investment context and how it can fit into your overall portfolio.

What is Cash?
In daily life, the word “cash” generally refers to the physical bills you withdraw from an ATM. More broadly, it’s the money sitting in your bank accounts right now. While these bank accounts often pay some kind of interest, the rate is usually lower than 0.5% per year.

The usual low yield on bank accounts means they may not be the best place to keep cash in your portfolio. That’s where cash equivalents come in.

When we talk about cash in the context of a portfolio or investing, we’re often speaking about cash equivalents. These are highly liquid products, filled with short-term investments, designed to pay a higher yield than basic savings accounts. The most-commonly used cash equivalent is a money market fund. These funds can be structured as mutual funds (regulated as securities) or savings accounts (regulated as a bank product).

The individual holdings within these funds range from certificates of deposit (CD) to Treasury Bills. The investments within the fund influence both risk level and rate of return. For instance, a money market fund that invests in riskier short-term assets and is regulated as a security may pay a higher yield than a money market savings account backed by the Federal Deposit Insurance Corporation (FDIC).

How Cash Works in a Portfolio
Cash in a portfolio can help create opportunity to buy new investments as they arise. However, whether you should have a cash allocation, and the size of that allocation, depends on both your personal circumstances, as well as the overall market and the economy.

Cash can also help diversify your portfolio. However, cash is subject to inflation risk; if the yield on cash equivalents is lower than inflation, the cash in your portfolio loses purchasing power.

There are times when cash equivalents become more attractive. When the yield curve inverts (as it did in 2022), short-term treasuries and other cash equivalents start to pay higher rates, which can make money market funds more appealing, depending on your objectives.

However, just because cash equivalents are yielding more doesn’t necessarily mean you should rethink the role of cash in your portfolio. Plus, if a cash allocation makes sense for your circumstances, it’s important to build the allocation strategically. There’s a difference between selling investments to hold cash and keeping any new additions to your account in cash. Both should be done strategically and with the rest of your portfolio in mind.

Having a cash position coupled with a disciplined investment strategy can change your perspective on market volatility and troublesome economic indicators. Why? Because that cash allocation puts you in a position to take advantage of a downturn by picking up stocks at a “bargain” price without locking in losses.

The Role Cash Plays in Your Financial Plan
Everyone’s financial plan looks different since it’s based on your current needs and future goals. How we think about cash and cash equivalents in your portfolio may depend on a variety of factors, including:

  • Your current emergency savings;
  • The going rate of short-term cash equivalent products; and
  • Upcoming expenses that require liquidity (like homebuying, starting a business, or paying for college).

Once we have a good sense of your personal finances, we can help clients spot opportunities to use cash and cash equivalent products to take advantage of changing interest rates.

This is more important than ever when inflation is high since higher yields on cash can help protect your purchasing power and mitigate inflation risk. If you have any questions about your current positioning or want to learn more about how we can address your short- and long-term financial goals, schedule a call to discuss.

IMPORTANT DISCLOSURE INFORMATION:
Please remember that past performance is no guarantee of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bogart Wealth, LLC [“Bogart Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bogart Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Bogart Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bogart Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.bogartwealth.com
Please Note: Bogart Wealth does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Bogart Wealth’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. 
Please Remember: If you are a Bogart Wealth client, please contact Bogart Wealth, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.  Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently.
Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

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