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!
That's a daunting return requirement under even the best of circumstances. Investing $100 in cash equivalent may provide low yields but at least you have your principal. There's something to be said for that when asset explosions are occurring on a daily basis.
It depends on your situation but having 20 or 30 percent of your portfolio in cash or short-term fixed income, even if you are a growth investor, is not such a bad idea. Some commodities, some fixed income, diversified global equities, all invested with a large portion of paranoia is probably a wise mix in today's uncertain environment.
Don't be lured by those that exclaim you simply MUST invest in a certain asset class or you will forever miss your opportunity for profit. Not true. Unless your time horizon is six months, you have plenty of time to be patient. Having cash in your portfolio will help you along the path towards a more stable, predictable investment strategy even in this crazy world we live in today.
Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). Michael oversees all investment and research activities of the firm and has over 20 years investment and financial planning experience. Michael is a respected lecturer speaking frequently on tactical asset allocation theory and appears regularly on CNBC and CNBC Asia. Michael can be reached directly at email@example.com.