This week Brian and Bo jump into the role and importance that cash can play in your portfolio. We’re all familiar with the fact that rates of return on savings accounts have been abysmal these past few years. It can make keeping cash on hand look very unappealing — after all, we could be earning more in the stock market.
But with the impending interest rate manipulation from the Fed, financial markets seem to be operating with additional volatility. Add China’s current turmoil to the mix and it is not uncommon to see the markets move 600-800 points throughout the course of the day. With all of that said, how should cash be integrated into your portfolio?
Cash is Great for Emergency Reserves
The Money Guys say it often, but cash is a necessary evil when it comes to having emergency reserves.
For those in the workforce, save up 3 to 6 months of living expenses. That means all living expenses, including debt repayment You don’t want to find yourself blindsided when an emergency (like losing your job) occurs. Recent graduates should take baby steps and save at least $1,000 to $2,000 to cover any insurance deductibles they have.
And for retired folks, Brian recommends keeping 12 to 24 months of cash saved up in case the markets head south. If you have an annuitized income stream, you can get away with less.
Don’t skimp on emergency reserves. You don’t want to be left completely exposed and without options should something go wrong..
Cash Makes Opportunity Capital Possible
Opportunity capital should be your last priority when it comes to financial planning. You need to check off the rest of the boxes before you reach this point — but it is a financial goal you can set once other priorities are addressed.
Think of Warren Buffett having cash on hand to help Bank of America, GE, and Goldman Sachs during the recession. Berkshire Hathaway has $58 billion in cash for a reason: opportunity capital.
Buffet’s quote, “be fearful when others are greedy and greedy when others are fearful” truly sums up the power of cash. Think about the headlines you see at the peak of a bull market:
S&P sets new record highs. Can the Dow hit 20,000?
No one thinks that things can go bad, but downturns have to start somewhere, and that somewhere is the peak of an expansionary period. The second half of Warren’s saying is the epitome of buy low, sell high. Be greedy (start purchasing) when everyone thinks the train has run off the tracks. This is typically the point of maximum opportunity.
Get the Best Returns from Your Savings
Want to get better returns on the money you have in the bank? Online savings accounts offer the best rates out there. Brian recommends My Savings Direct (1.10%), GE Capital Bank (1.05%), Barclays (1%), and Ally (0.99%).
Skeptical of online-only banks? Credit unions offer the second best solution. And you can always check FDIC.gov if you’re unsure if an online bank is legitimate or not.
Remember that cash does belong in your portfolio, but try not to get carried away with excess reserves. If you are looking for a way to diversify away from excess reserves our recommendation is to always dollar cost average into a very cost effective index fund.