Cash is an asset class like stocks, bonds, or real estate, and it acts as a buffer during times of market uncertainty. When stocks fall, cash is a haven, and it reduces your downside losses. It can also give you peace of mind knowing you have access to funds that don’t fall significantly when all hell breaks loose. It is a port in the storm.
The 1-month US T-Bill is a proxy for cash and is considered the safest investment in the world, and it has never lost money. It has averaged a 2.4% return since 1992. As stocks corrected in 2000, 2008, and 2020, T-Bills gained 2.6%. Look no further than US T-Bills if you want a secure investment.
A diversified portfolio should include stocks, bonds, and cash. Cash gives you dry powder to buy stocks or bonds when they are down, and you can dip into your cash reserve to buy shares at lower prices when stocks fall.
Long-term, however, T-Bills lose ground to inflation and equities. Since 1992, the inflation-adjusted annual return was 0.1%, while the S&P 500 averaged 7.7% per year. If your time horizon is three to five years or more, invest for growth. The S&P 500 has gained 80.5% over the past five years, while T-Bills lost .04%.
Here are a few suggestions about incorporating cash into your investment program.
- Create an emergency fund to cover nine to twelve months of expenses.
- Allocate cash to your sleeping level. How much money do you need in your bank account to feel confident? Whatever your number is, that’s your sleeping level amount regardless of your monthly expenses or investment allocation.
- Diversify your cash assets to include savings accounts, money market funds, CDs, and US T-Bills.
- Allocate 1% to 10% to cash in your investment models. A 60% stock and 40% fixed income portfolio may include 1% to 2% cash allocations. If you’re conservative, increase your cash balance.
- Increase your cash balance if you need money in one year or less. Are you buying a new home or paying for tuition? Will you take a trip or buy a new car? If so, invest in cash and not stocks.
- The Federal Reserve will raise interest rates. As rates rise, your cash balances should earn more money.
Investors get frustrated with cash when stocks rise but welcome it when they fall; a proper cash balance can benefit you in most market conditions.
Revenue is vanity, profit is sanity, but cash is king. ~ Unkown
March 4, 2022
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management, located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.
 S&P 500 = VOO; US T-Bills = GBIL. GBIL is a fund managed by Goldman Sachs.