My Sunday Washington Post Business Section column is out. This morning, we look at the question of How much cash should you hold in your portfolio?.

This is yet another column  that looks like its about investing but really is about psychology.  As I noted prior, people have been sitting on big piles of cash this entire rally, and missed a huge opportunity to rebuild after the crisis.

Here’s an excerpt from the column:

“That is not the cash matter I want to discuss today. It’s this: How much cash should there be in your investment portfolios? You may not have given it much thought. It seems to be coming up a lot among the ultra-wealthy. As mentioned before, many of the investment firms that service the wealthy have discovered that these folks are sitting on mountains of cash. Broad surveys from the likes of U.S. Trust, BlackRock, UBS, even American Express have shown that their high-net-worth clients are cash-heavy and, in many cases, asset-light.

Why the ultra-wealthy have decided to sit in an asset class that loses value by the second with even modest inflation can most likely be explained by psychology. Call it the “recency effect” — investors are still shellshocked by the four asset crashes in a decade. From their peak years, we had technology/dot-coms fall about 80 percent (2000-02). Housing dropped 35 percent (2005-09), including the related falls in home builders, banks and investment firms of 75 percent. Equity markets crashed 57 percent (2007-09). And, lastly, commodities are off their highs anywhere from 30 to 50 percent (2011-13). Is it any surprise that investors are skittish?”

Food for thought . . .


How much cash should you hold in your portfolio?
Barry Ritholtz
Washington Post, December 15, 2013

Category: Apprenticed Investor, Asset Allocation, Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

23 Responses to “What Is the Right Amount of Cash In Your Portfolio?”

  1. Imspartacus says:

    Thank you for this great article. As far as the laddered bonds go you can also use ETF’s that have been created for this purpose. I-Shares, and Fidelity offer a diversified portfolio at a low cost of high quality municipal and corporate bonds which mature out to 2021 or so. This might be easier for some who do not have the aptitude or time to research individual issues. Thanks again.

  2. rd says:

    Sounds like The Bernank and The Yellen need to push NIRP (Negative Interest Rate Policy) instead of ZIRP to force people out of cash and into assets if the Fed wants to get the economy kick-started.

    Your Post column is a classic example of why trickle-down has not been working for the past 30 years. Preferentially giving the money to the wealthy does not result in their re-investing in the economy or increasing purchasing in proportion to their wealth gains.

    Since the wealthy are supposed to be the “smart money”, what meassage does this send about their belief in growth of the stock market and the rest of the economy?

  3. slowkarma says:

    For small investors, holding a lot of cash is a reaction to the fact that they’ve probably lost their shirts at least three times since 2000, and they have the growing feeling that the economy no longer operates in a way that’s essentially understandable to them. That is, whether or not we prosper as investors depends not so much on the basic economics of manufacturing, service industries, etc., as on unpredictable decisions made in private by a few members of the Fed. There’s a widespread feeling that the market could sharply decline depending on when the Fed starts to cut back on its policy of easy money…but who knows when that will be? The uncertainty over Obamacare (17% of the economy) and the lack of direction from Congress doesn’t help either, nor does the spectacle of major banks paying huge fines for misbehavior, weird events like the bubble in bitcoins, and out-and-out frauds like Madoff. So — if you hold your money in cash, in this low-inflation environment, you’re probably not going to lose your shirt again. And enough people have been hurt badly enough, enough times in the very recent past, that I think they’ll settle for that, at least for now.

    • I specified 5 shirt losses:

      1. 2000-02 Technology/dot-coms fall < 80 %; 2. 2005-09 Housing dropped 35%; 3. 2005-09 Home builders, banks and investment firms fell 75%+ ; 4. 2007-09: Equity markets crashed 57% 5. 2011-13: Commodities are off their highs anywhere from 30 to 50%.

  4. peterkrause says:

    You have to understand, sir; we readers love your posts, and the diligence with which you apply your principles. It leaves very little room for quibbles. Here’s a small one. It has been clearly shown that missing the five worst days of market performance in a given period is more deleterious to portfolio results than missing the five best days. I would think that prudence dictates more than 2 to 3 percent cash as a bull run gets long in the tooth.

    • LOL What makes you think most people (or even any people) will be able to a) get out before hand; b) not get out so far in advance so as to make the missed upside turn the missed correction into a meaningless blip; c) be able to get back in?

      Besdies, cash should be in checking/money market not your long term investment portfolio

  5. ComradeAnon says:

    Maybe they watch a lot of Doomsday Preppers. I hear the end is near.

  6. scottinnj says:

    As always good stuff to read and it will give me much to think about.

    One question/quibble…you recommend A rated bonds in your ladder would not Treasuries be a better choice in a fixed income portfolio? You can buy Treasuries with no fee direct form the Treasury, while you be paying a fee and the bid/ask spread on a Corporate Bond. Second you run the risk of lack of diversification….how would buying A rated bonds work out for you if the name you picked was Lehman or HJ Heinz? I understand the yield premium on Corporate debt but it is there for a reason and you probably benefit greatly from diversification in Corporate debt as you do in equities.

  7. km says:

    A large fraction of my portfolio is in cash right now, though I don’t think we’re exactly ultra-wealthy and the cash hasn’t been sitting around for long. The reasons are a little different and might not apply to many people but I thought I’d mention them for a different perspective.

    I’m in Silicon Valley. The bulk of this year’s income will be from stock in my employer vesting. For a variety of reasons (lots of stock still to vest, at 6 month intervals, plus kids coming up to college age, plus too much exposure to one company) it seems like a good idea to sell the stock as soon as possible after it vests. But then the cash sits around for awhile before being put somewhere else. Stock grants are pretty common around here, but it’s possible that actually selling the stock is more unusual, so I don’t know how common it is to have this situation.

    Also, I have heard that a lot of people put a large percentage of cash down in house purchases around here. Given how incredibly expensive housing is in this region, maybe people are holding a lot of cash in expectation of buying homes? Not the case for us, but thought I’d throw it out there.

  8. mikeinconyers says:

    We had a lot of cash in our mix when the market bottomed out a few years ago, and put it to use to great effect. After the market ran up a good bit, we started moving some into cash. Part of our thinking was to have a more appropriate mix of stocks and cash, since the gains we were realizing made it appear that we would be able to retire sooner than we had anticipated. Additionally over the years, I had learned some things about my investment psychology, one key factor is my nearly pathological resistance to selling on the way down.

    As the market has progressed upward, we have continued to periodically move more and more into cash, at present we are 68% cash. That is a lot, showing my belief that there is a pretty high likelihood that market will be cheaper at some point in the future, possibly significantly so. Additionally we are putting new money into the market every two weeks via our retirement plans at work. If the market continues up, our cash percentage will drop as it will from our periodic purchases. If the market goes down, we’ll use some of that cash buying stocks on sale. Either direction for the market, I see our cash percentage dropping, but I feel pretty good where it is right now.

    • Interesting comments which raise several questions:

      How long did you sit in cash previously waiting for the 2009 crash?
      How much cash did you deploy in Match 2009? Q3 & 4 2009? 2010/11?
      What has that much cash done to your performance?
      How long can you sit in 68% case?
      What would make you deploy that capital?
      How much rally are you willing to miss waiting for the next correction?

      I don’t know the answers, but these are the questions we wrestle with all the time.

  9. Giovanni says:

    Maybe they’re turning Japanese because cash is king in deflationary times? If we’re about to lose a few decades ourselves with the Fed trapped at the zero lower bound and with running the printing presses 24/7 not showing much effect in the productive economy maybe they can afford to sit on their cash until inflation picks up and/or the economy shows more signs of strength. Maybe with inflation at one-and-change it’s cheaper to sit in cash than pay two and twenty?

  10. Frilton Miedman says:

    By default, isn’t it normal for a large quantity of the smaller investors to hold cash until late in the rally?

    The “dumb money”?

    Keeping an eye on ICI fund flows might also be prudent, which happen to have improved recently.

    That aside, in light of the effects 2008 had on median net worth & income, it would also be no surprise if some of that money stays out while (if) household deleveraging continues.

  11. hellersd says:

    Having a bucket of cash to ride out those “shirt loss” periods makes a lot of sense. You’re probably familiar with the “Bucket” theory way to invest for retirement, Barry, and for me it has made those gut-wrenching periods when the market tanks and I really want to bail more tolerable. Keeping enough cash in an account that will tide you over 5-6 years of a bad market will allow you to leave the rest of your portfolio alone, and maybe even allow you to pick up some new stocks during the fire sale.

    • Assuming you have the discipline to deploy that cash when the time is right. In my experiences, most people DO NOT.

      I have read far too many inquiries “I got out in 2008 when you said to, but I could not bring myself to jump back in”

  12. intlacct says:

    Poor benighted cash.

    Cash has several redeeming qualities: F’rinstance, it has an absolute value and if you have a) any or b) lots, it facilitates buying from less capable hands in each of the five defrockings listed above. In addition, when it is late 2008 and the market drops 700 points in a day, having it enables a colleague to tell you, when asked how he is handling the vicissitudes of the market, “Frankly intlacct, i don’t pay any attention. I’m in cash.” “Why is that colleague?” “I have several members of my family who were close to retirement before the depression and they had to work considerably longer because they didn’t go to the mattresses in time.”

    I encourage all my investment competitors to maintain only the most vaporous balances in cash.

    dedicated bargain hunter since 1902

  13. Keith R says:

    The Fed has taken a huge amount of securities out of the marketplace, and this has been replaced by cash. I don’t think that the total volume of cash is related to investor sentiment–somebody has to hold it. So its a question of whether each of us is now holding more or less than our share of the additional cash in the system.

    You can count me as one of the “cash-heavy/asset-light” crowd that is holding more than my share. I have been scaling out of equities this year due to my perception that they are expensive now. But that is only one half of the investment equation. I would prefer to have re-balanced into bonds with a significant portion of the freed up cash. However, the Fed has it’s thumbprints all over that market, so bonds seem expensive too. So I sit with too much cash and short term paper. I understand the cost of holding cash versus inflation, and I hate it. But that is how things are now.

  14. boughtnheld says:

    Why are small and large investors holding so much cash as a percentage of their investible portfolio?

    1. Lack of trust. (TBTF Banks are larger now. HFT trading liquidity is evanescent. Flash crashes. No effective regulatory correction of the banks, the shadow bankers, or the ratings agencies responsible for the 2008-9 crash.)
    2. Recency effect as you said. Four major equity crashes in 13 years. Resulting in lack of trust.
    3. Demographics. The boomers are all closer to retirement now.
    4. A hedge against deflation.
    5. For the small investor, a hedge against SHTF and employment uncertainty.
    6. A lack of safe, reasonably priced investment choices. Both the domestic stock and bond markets, and significant overseas equivalents are distorted due to QE.
    7. A strong sense that we are in uncharted waters, due to QE, yield curves, government dysfunction etc.

    This is not a major mystery. See #1 above. Lots of us are persuaded that the game is rigged against us. Take the LIBOR rigging scandal as a random data point, or the London Whale, or MF Global, or the lax regulatory environments that routinely permit scandals like ENRON, Worldcom and Bernie Madoff to persist for many years.

    I understand that you knew this already, and probably did not mention it due to lack of column space.