This week we are discussing what some may believe to be the least exciting instrument within a portfolio. However, we should never underestimate the role it plays within the investment allocation.
Investing in cash may be underwhelming for most, but it plays a vital role in the management of your portfolio.
Some of the advantages to holding cash within a portfolio, include the ability to control volatility within an investment. Whilst it can also be done with bonds to balance the risk, cash may be a better hedge in the rising interest rates environment. Bond prices tend to decrease when interest rates are rising, which just doesn't happen to cash.
Holding cash puts us in a favorable position to take advantage of attractive investment opportunities within the stock market as it declines rather than having to disinvest existing holdings.
This, however, may have its own drawbacks as it limits growth and creates inflation pressure within a portfolio, the appropriate amount of cash allocation should be taken within a portfolio according to your own risk profile.
Performance in the long run of an individual's cash exposure should be evaluated regularly to ensure that you achieve your long term investment goals.
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