When volatility emerges in markets, most investors intend to hold their cash. It helps one protect his savings and provides opportunities to invest when financial assets can be possessed more smoothly. Throughout instability, cash assets will be the key to sustain your financial stability.
It is essential to keep a part of your savings in cash assets, although interest rates on cash assets recently are very low, even negative in some economies. Why would you invest in cash assets while you can earn more when you invest in less liquid non-cash assets? Although this seems like a reasonable question, there are at least two reasons why you should keep cash assets in your portfolio.
First, unexpected emergencies, such as home maintenance expenses and medical emergencies, could happen at any time. If you invest your money in investment funds or pension funds, there might be some tax disadvantages or penalties when you liquidate them in case of such unexpected expenses. If you invest in stocks and bonds, you might not be able to sell them at their fair value, especially when the markets collapse. What’s more, it generally takes two business days to settle when you sell a financial asset. If you select very illiquid assets, such as real estate investments, you might not be able to sell them even if you accept to sell them at a price that leads to a significant loss.
To sum up, if you need to sell a non-liquid asset immediately, it might result in a loss higher than the opportunity cost you would have when you keep some cash as an emergency fund. Therefore, emergency states have to be considered essential spending items well as short-term and long-term investment goals. An amount allocated to use for healthcare, housing, and other minimum expenses makes you feel comfortable during such periods and prevents a potential downgrade in your life quality.
Dry Powder Reserves
The markets are very volatile. It is inevitable to face contractions in a market affected by so many variables. Holding cash enables you to seize opportunities that arise when the markets collapse. What is more, when you keep money in your portfolio, you will be able to foresee your future without panic and follow your investment strategy, knowing that you have enough buffer to cope with a possible turmoil in the financial markets. It also enables you to be flexible while trading.
How/How Much Should I Retain in my Portfolio?
This question doesn’t have one answer, as it can be modified depending on the risk you can undertake, your goals, budget planning, and the amount you want to invest as a hedge. Investors may hold up to 30 percent of their portfolio accordingly. As mentioned above, we suggest you allocate a specific percentage of your portfolio for emergency and “dry powder”. Namely, like keeping your powder dry to attack, you should make your cash ready to be transacted for better yields and opportunities.
As HALKBANK, we care about your financial needs and offer maximum expertise, professionalism, and transparency. If you are ready to allocate some of your funds to cash assets, please visit our webpage to get more information about our products.