[In Pictures: 6 Numbers Every Investor Should Follow.]
First, opportunity is the key. Without cash, it is almost impossible to take advantage of opportunities that may present themselves.
Warren Buffett, one the world’s most respected investors, tries to keep at least $10 billion in cash. Currently, he’s holding a much bigger pot, but his goal is never less than $10 billion. Recently quoted in his annual letter, the 81-year-old chairman of Berkshire Hathaway (BRK.A is currently trading at above $100,000 per share) said, "The elephant gun has been reloaded, and my trigger finger is itchy." Obviously, he is looking at opportunities.
An example of one of his opportunities was in 2008-2009 when the market was tanking. Having cash available allowed him to buy into General Electric, helping that company out of a jam and significantly benefiting his shareholders.
Next is the more obvious reason. When cash is paying nothing and stocks are going down, “nothing” beats losing. Currently, a good cash position makes sense.
It’s interesting how many investors, from individuals to brokers, don’t view cash as an asset class. It is completely okay and sometimes very wise to have a position of cash in your portfolio. Currently, we are holding 25 percent cash in our clients’ portfolios and have been since May.
The unfortunate view of most is that cash is not a position and needs to be moved to something else. I say only if there is something else that is better. So here you could view your cash position as an opportunistic play or simply a conservative stance.
Finally, holding cash for a short-term need or even a short-term potential need is always a good idea. We often tell our clients to hold three to six months of living expenses in cash for emergencies. For instance, if your current costs are $5,000 per month, then you should be holding at least $15,000 to $30,000 in a completely liquid cash account. Having that kind of cash on hand will prevent you from having to sell your investments to pay for that emergency.
Typical emergencies include things like paying for a new roof or fixing your car or even having to take the dog to the vet and getting stuck with a large bill. Still further, an emergency could involve bailing out one of your kids, but no matter the case, having the cash on hand is integral to your planning.
To take this emergency fund idea a little further, sometimes our clients are not as comfortable with their employment situations, or they may be starting a new business or even moving to a new home. These would definitely be good reasons to hold even more cash.
Remember, the issue with not having cash is the necessity to liquidate your investments. You simply don’t want to sell when the market is down.
So don’t be afraid to hold extra cash. It could help you with emergencies, with keeping things together during difficult or changing times, or even with taking advantage of great opportunities.
Good luck and happy investing.
Kelly Campbell, Certified Financial Planner and Accredited Investment Fiduciary, is founder of Campbell Wealth Management, a Registered Investment Advisor in Alexandria, Va. Campbell is also the author of “Fire Your Broker,” a controversial look at the broker industry written as an empathetic response to the trials and tribulations that many investors have faced as the stock market cratered and their advisors abandoned their responsibilities to help them weather the storm.