When Cash is King.... and When It Isn'tSubmitted by Alloy Silverstein Financial Services, Inc. on August 26th, 2020
When preparing a financial plan for any client, one of our primary goals is to have enough income sources, even if there is a periodic disruption in the investment portfolio. Some fortunate clients have a pension, social security, annuities, bond interest, and/or dividends that will cover their needs. But how do you prepare if those sources are either not available to you or inadequate to pay your bills? There is always cash.
We generally advise that you keep anywhere from six months to one year of cash in a liquid, safe account. Why?
- If your investments go through a rough patch, then you don’t have to worry. Hang in there and use the cash “emergency fund” to pay the bills if needed; that way
- You don’t have to sell your investments when they are at a low point, or in a panic; because
- You know you can pay the bills while you wait for a market recovery
Of course, the amount of cash to hold also depends on things like:
- The age of your house, for example, and possible unexpected repairs that may be needed;
- The age of your car, for possible repairs (or maybe a down payment to replace it);
- Other upcoming expenses, like a wedding, school, vacation, etc.; and
- If you are so worried about the future of the market that you don’t want any risk.
In short, having a cash safety net will tend to help you to sleep at night knowing that you can meet your needs. However, there are times when holding too much cash, or cashing out at the wrong time, can be detrimental to your
financial health. Some examples are:
- You are still young, and if the equity markets decline for a period then you have a lot of time to recover (which historically the markets always have done). Time is on your side;
- The market has suddenly had some bad news and is declining or has declined precipitously. On rare occasions, we have had one or two clients who have called and, against our advice, decided to sell at exactly the wrong time. Holding the cash “until the market recovers” means two things: you have locked in your losses, and you will miss the initial recovery. The March and April 2020 market gyrations are a very good example and there are many studies showing that this is not a good strategy for the long term (i.e., your investment return is significantly less than if you had just stayed in). If you have the needed cash sitting on the side (the 6-12 months mentioned above), then you shouldn’t have to bail out or worry about waiting for the market to recover; and
- As mentioned above, if you already have plenty of cash flow from pensions, social security, annuities, etc. to cover all of your expenses then you don’t really need to set excess cash aside, even though you may want to do so.
The key to all of this is to get a full evaluation of your needs and how you have met or can meet them through a personal retirement plan. That way, you can sleep at night knowing that all of the needs of you and your family will be met.
Call us if you wish to discuss this further!
Please be safe.
by Ronald Donato, Jr., CFP®, MBA
Director of Financial Services