Cash vs. investments

[henrikbeech]

Cash vs. investments

Hi All,

Holding huge amounts of cash often goes hand-in-glove with reduced capital investments.

[BuckyBadger]

Our family is working on getting our emergency cash built up in-case we come into a time of hardship. We plan to keep at least 30% of our investable money in the bank, with the other 70% mixed in with mutual funds, stocks, and 401k.

Just checking because a lot of people don't understand exactly how it works -- a 401k isn't a type of investment, it's just an investment vehicle. It's a "bucket" (a tax-advantaged bucket) inside of which you hold your investments. Those investments can be equities, bonds, mutual funds, index funds, or a lot of other things.

Also, I'm wondering why you would keep 30% of your investable money in the bank. If this is for an emergency fund, why is it related to a percentage of our overall portfolio? The amount of money you need for, say, 6 months in case of an emergency isn't related at all to the amount of money you have saved up in investment accounts. If this is for some large future purchase like a house, again, the percentage nature of it has nothing to do with what you need for the purchase.

If you are saying that you plan on an asset allocation where 30% of your funds is in cash I would strongly recommend against it. You are in the accumulation phase of your investing. You should be in stocks and bonds (low cost index funds if possible). Outside of an emergency fund, I think it is a bad idea for a non-retired (or about to retire) person to have a ton of cash sitting around. It's not doing anything for you. You should pick an asset allocation with which you're comfortable (such as your age in bonds) and invest early and often.

[JBinKC]

Over the years my cash percentage in my portfolio have ranged from 0 to 80% if you include bond funds. I find it difficult when you keep it near zero it is sometimes hard to rank securities as a sale candidate if a better bargain came up.

In the last 2 years I am still beating the market averages keeping it in the 15-40% cash position range by increasing my portfolio turnover and generally concentrating on higher beta stocks.

[thesimplemoneyblog]

Over the years my cash percentage in my portfolio have ranged from 0 to 80% if you include bond funds. I find it difficult when you keep it near zero it is sometimes hard to rank securities as a sale candidate if a better bargain came up.

In the last 2 years I am still beating the market averages keeping it in the 15-40% cash position range by increasing my portfolio turnover and generally concentrating on higher beta stocks.

Bonds are not cash (nor should they be thought of as similar to cash). Yes, they are typically more stable than stocks, but values can decline in the bond side of the portfolio too quite significantly (especially if we start to head into a rising interest rate environment).

[Jimhassel]

An emergency fund, in the form of an easily-accessible liquid savings account, should be kept for those unpredictable or emergency expenses. For me, cash should of 10 to 15 percent of your income. Rest you should keep it as an investment.

[stockmarketmate]

It depends on your age. If you are young you can take more risks and invest up to 80% of your money in the stock market or buy bonds. If you are older, you might want to consider investing in long term CDs with your local credit union. Do your research prior to investing and know what you are getting into.

[bUU]

I don't think that there is really a percentage. It has to do more with what you need.

I agree. The purpose of the emergency fund is to cover your expenses for the three to six months in case something unexpected occurs and you lose your main source of income.

Your emergency fund is probably best kept in cash, or something with higher liquidity.

I've read very little support for the emergency fund being anything other than cash, deposit accounts, CDs, money market accounts, or I Bonds that are more than a year old.

Any money in savings that you will need within the next 5 years should be kept fairly liquid. Anything not needed for 5 years or longer could be put into stocks, bonds, or mutual funds.

I'm not sure where that five years comes from. I've never seen anyone else talk about a five year horizon for liquid assets, nor does it make sense to me, since it takes far too much of too many people's assets out of the market for too long. The reality is that you have to expect that your emergency fund, in liquid assets, is going to lose value over time against inflation. That's a reality of today's market. So I see no value in artificially increasing the amount of assets that need to be liquid.

There is a matter of short-term investments as a component of one's investment asset allocation (alongside equities, and bonds). But that's beyond one's emergency fund, as far as I'm concerned. And that would be a percentage of invested assets, not a reflection of expenses.

[Chart_oasis_man]

Bonds are not cash (nor should they be thought of as similar to cash). Yes, they are typically more stable than stocks, but values can decline in the bond side of the portfolio too quite significantly (especially if we start to head into a rising interest rate environment).

Bonds are not cash, that is sure. Bonds represent debt, and a bond's value depends on the debt...
People often think that "oh, bonds are less risky than stocks but have better profits than cash", but that is not true.
Just think about what has happened to greek bonds recently...

[Rainbow Traveller]

Cash is only recorded when money changes hands, that is, it will only be recorded in the statement once the business has 'actually' received money, rather than what it is 'promised' to recieve. For instance, if a business makes sales which are 20% on cash and 80% on credit, then the cash flow statement will only record the money received for the "20%" of sales and it will record the rest of the "80%" when it has 'actually' received this money.
Investing is taking this a step further. Once you have a good amount saved, you can begin investing money. Investing is the way that you will begin to really grow your money and begin to build wealth.

[bUU]

Investing in bonds is ... more profitable than stocks.

Untrue. If you're going to post seven pointlessly trivial messages in rapid succession the day after joining the forum, please at least try to make it look a little less obvious that you're just gearing up to spam the forum. Try presenting accurate information instead of reductionist nonsense.