What is the Right Amount of Cash to Hold in Your Portfolio?

How should you decide on the appropriate level of cash to hold? We believe there are several points an investor should consider 

Dan Kemp 31 October, 2017 | 11:45AM

Cash is a very useful tool for investors within all portfolios, with utility that provides liquidity and capital protection. However, it has a long history of underperforming almost every other asset class. So, how does one decide on the appropriate level of cash to hold? When sizing, there are several points an investor should consider in the portfolio construction process.

Cash is a liquid asset that offers virtually no long-term growth potential 

Cash as the Default Option

Cash is a liquid asset that offers virtually no growth potential in a long-term context. As such, cash is generally an exposure that is used for liquidity purposes and otherwise depends on long-term deployment opportunities within other asset classes. Or to say this another way, cash exposure within portfolios should be directly proportional to how a client’s objectives and constraints result in the need for short- versus long-term outcomes.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Dan Kemp

Dan Kemp  is Chief Investment Officer, Morningstar Investment Management EMEA

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