Q: Most asset allocation advice concerns stocks and bonds. Should I also keep a certain amount of my assets in cash?
Generally speaking, cash is a poor investment choice. Not only do cash and equivalent investments generate small (if any) returns, but thanks to inflation, a stockpile of cash actually loses purchasing power over time.
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However, there are a few exceptions.
First, everyone should have an emergency fund that is in readily accessible, cash-equivalent assets. Experts say that you should aim to save at least six months' worth of expenses in cash, in case of a job loss or major unexpected expense.
Next, if you're already retired and rely on your investment portfolio for income, it's not a bad idea to keep a few months' worth of income in cash.
Finally, and this especially applies today, it's fine to keep some cash on the sidelines if you're having trouble finding attractive investment opportunities. To be clear, I'm not telling you to try timing the market, which is always a bad idea, or to permanently keep a certain amount of cash. But when the market starts to look expensive (like it does now), it can be difficult to find attractively priced stocks, so instead of forcing yourself to buy stocks or funds that look expensive, you'll have some cash available for when you do find a compelling opportunity. In fact, this is exactly why Warren Buffett has allowed Berkshire Hathaway's cash hoard to build up to nearly $100 billion.
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