The role of cash in an investment portfolio
You say cash is an important part of any investment portfolio. What role does cash play in a growth portfolio?
- Holding cash in a growth portfolio provides a degree of insurance should there be a large fall in the values of other investments. In times of market turmoil, prices of assets such as shares and fixed interest securities can both fall substantially. If this happens, holding cash will help ensure that a proportion of the wealth in the portfolio is protected.
Why do you adjust the percentage of cash in the portfolios from month to month?
- We vary the percentage we hold in cash from time to time depending on the state of investment markets. For instance, with share markets currently very volatile and a high degree of uncertainty about investments we have decided to hold a higher percent of the total portfolio in cash. This provides increased protection against the possibility that markets will decline substantially. When markets stabilise we will have cash available to buy shares.
- It is worth noting that even in good market conditions we will hold a small proportion of cash to allow us to take advantage of market opportunities as soon as they arise. Other investments, such as shares and fixed interest securities, often cannot be sold quickly enough for that purpose.
If my portfolio says I’ve got 30% in cash, is that just a bank deposit or something else?
- Cash consists mostly of money in on-call bank accounts.