Buy equities ... buy commodities ... buy xyx ... the headlines scream buy now or miss your opportunity of a lifetime. Okay great. It may well be that these assets have investment merit, but let's be real, in an environment like the one we're living in today, there is no substitute for having cash in your portfolio. Yes, your yields will be low but the return of your asset values (principle protection) can help your overall portfolio strategy especially when so many other assets are beat down.
What exactly is cash? Treasury bills, insured bank deposits, other government bonds and stable money market accounts qualify. You’re looking for assets that provide you with a high degree of probability your principal will stay intact.
Does this mean that you abandon equities, fixed income and commodities? For most people, the answer is no. It's about balance and being prudent as you invest. It's a probability game and for most investors, having cash in the portfolio helps soften the bumps as the markets gyrate.
Why does this make sense even if opportunities appear to invest in equities and bonds? It's simple math really. Making up losses is a big hill to climb. We all know how the formula works. If you invest $100 and lose 50%, you now have $50 remaining in that asset. To get back to breakeven, you need to capture an investment return of 100%. That's what you need to do to simply break even and make zero profit!