Why You Need A Plan For All That Cash In Your Portfolio

How to think strategically is critical to your next action

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A hoard of cash in your portfolio is always a double-edged sword.  It provides security, comfort, and the flexibility to deploy in virtually any asset class at any time.  It also can be a significant drag on your returns if you prolong your stay and cause undue stress with the knowledge that you need to put that money to work.

The more I speak with prospective clients this year, the more I hear that investors have a lot of cash on the sidelines.  Some fear a collapse in stocks or bonds, while others simply don’t have the right tools or discipline to properly invest their money.  In both situations, it’s important to identify the issue and take meaningful steps to create some inertia.

Sometimes it’s just overcoming that first small trade before you start to realize that putting the money to work won’t be the end of the world.  It will also give you confidence to start critically analyzing your asset allocation and making incremental adjustments to reach your long-term goals.

Unless you just inherited some money or rolled over your 401(k), an overabundance of cash is often a sign that there is no true plan in place.  Waiting on a market correction is not a plan.  It’s a form of timing that will likely only be rewarded through luck rather than skill.

Just saying that you are being conservative or cautious right now isn’t a plan either.  It’s a justification to support your current condition.   If you were truly conservative, then you would have probably staked out a semi-coherent asset allocation in a small degree of stocks, short duration bonds, or even gold.

I always advise investors who have 50% of their portfolio or more in cash to evaluate their situation, both past and present.

  • Did you sell down several highly appreciated positions and are waiting to buy back in?
  • Are you uncertain about the election, the Fed, or some other unknowable force?
  • What price levels or other factors would trigger you to put this money to work?
  • Do you understand the strengths and weaknesses of your current position?

Let’s look at some of the numbers for a minute…

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