When looking into funds or your own portfolio, cash is important because it will allow you to purchase more assets when the prices fall, but it will keep you safe from an overall market downturn. Many people look at cash and think that’s not a position, but it certainly is and can be used to your advantage in your investing style.
When looking into a mutual fund, you may want to see little cash because the fund is supposed to be going towards a goal for the annual return. The diversification within the fund should be enough to eliminate specific risks, meaning most of the cash should be put to work. On the other hand, if you are in a bond fund, it may be more acceptable to have a little more cash on hand as holding cash is essentially risk free.
Negatives to having cash in a fund or your portfolio is that the money is not growing. There are options such as money market accounts, but that will earn minimal interest and is not an investment for the long term, but rather capital preservation. Also, you have to look at the inflation rate, because if your money is not earning over 2%, you run the risk of losing money due to inflation. There are many factors involved with cash and each situation has its pros and cons, so be sure to understand what each scenario is telling you.
Rounding the discussion, you typically want to see most, if not all the funds available being invested because the missed opportunities are greater. If another 2008 happens, then it is completely understandable that cash positions are larger because it will limit the negative affects. If you have questions, reach out to the companies that produce your products you might invest in and ask why they have cash allocations as they do. Be sure to have a full understanding before moving into new positions, and if you still feel nervous, just forgo that particular product and check another one out. Cash position weighting is just as important as any other factor in your portfolio or the funds you are investing in.
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Nathan Young is a Senior Member of Macroaxis Editorial Board - US Equity Analysis. With years of experience in the financial sector, Nathan brings a diverse base of knowledge. Specifically, he has in-depth understanding of application of technical and fundamental analysis across different equity instruments. Utilizing SEC filings and technical indicators, Nathan provides a reputable analysis of companies trading in the United States.
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