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What Is the Right Amount of Cash In Your Portfolio?

Posted By Barry Ritholtz On December 15, 2013 @ 10:00 am In Apprenticed Investor,Asset Allocation,Investing | Comments Disabled

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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? [2].

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 . . .

 

Source:
How much cash should you hold in your portfolio? [2]
Barry Ritholtz
Washington Post, December 15, 2013
http://www.washingtonpost.com/business/how-much-cash-should-you-hold-in-your-portfolio/2013/12/12/cd98315a-61ef-11e3-8beb-3f9a9942850f_story.html


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[1] Image: http://www.washingtonpost.com/barry-ritholtz/2011/03/31/AFWBwIBC_viewAll.html

[2] How much cash should you hold in your portfolio?: http://www.washingtonpost.com/business/how-much-cash-should-you-hold-in-your-portfolio/2013/12/12/cd98315a-61ef-11e3-8beb-3f9a9942850f_story.html

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