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There are times when having cash in your investment account makes more sense than being fully invested.  The amount of cash to have available at any given time varies when it comes to money management.  There are times when being fully invested is appropriate and there are times that having as much as twenty percent cash makes sense.  There will be times that having more than twenty percent cash is appropriate, but those scenarios do not happen that often.  I field questions from clients for many reasons, but the one I have heard most lately is “Why do I have so much cash sitting around?”

We raise cash for various reasons, but the biggest reason is that having cash on hand when markets become fully to overvalued can create a significant opportunity to take advantage of market corrections.  If you have read any of my previous articles, you may remember that market corrections of ten percent or more happen quite often.  In fact, these types of corrections happen on average every eighteen months and usually last on average three to four months.  The time to raise cash is not after the market has already corrected, but prior to the correction.  Having cash on hand allows us to take advantage of assets being mispriced or undervalued and can have a significant impact on the volatility of your portfolio as well as the overall return on investment.  When opportunities present themselves it’s much more difficult to raise cash to take advantage of these situations than it would be to already have the liquidity necessary to capitalize.

Today, the problem with the market is that bonds and equities are sitting at or near all-time highs.  In fact, the bond market is probably a more risky play than the stock market at current levels.  The thirty-year treasury is yielding a mere 2.95 percent.  This means if you buy a thirty year bond from the United States government and own it to maturity, you will barely keep up with inflation.  Does this sound like a good deal to you?  Keep in mind that as interest rates rise, the value of your bond drops.  Are you willing to wait thirty years to get your money back should we move into long term rising interest rate environment?

Look, I am not saying go sell all your bonds and all your stocks.  I am saying be prudent.  Raising a little cash is not going to hurt you.  It’s a smart time to have some cash sitting around, because opportunity will present itself and you need cash on hand to take advantage.