Risk or growth? The role of cash
Cash plays an important role in a diversified investment portfolio, but with interest rates at an all-time low its return may look less appealing. On the other hand, global markets look increasingly volatile in the foreseeable future. If you’re re-thinking the balance in your investment portfolio, start with these tips.
The risk of market exposure
Whether you’re investing for short term goals (like a holiday or renovation), or long-term wealth creation, falling cash rates and increasing market turmoil mean it’s never been more important to diversify beyond one asset class.
As you build your wealth, volatility in the markets can have a disproportionate impact on a larger portfolio. And the shorter your investment goal’s timeframe, the less time you have to make up any loss – a market correction could wipe out years of savings.
Fixed income and asset liquidity
As well as being low-risk, cash investments (such as a Citibank Online Saver) and fixed income investments (such as bonds) provide two advantages: an income return (in the form of interest or other payments) and easier access to your money.
You might appreciate that cash if you need to meet loan payments, or pay building costs or for flights. Selling your shares or other assets quickly for cash flow needs can result in a loss.
A smart investment portfolio will have some exposure to growth investments, as well as defensive strategies.
As you get closer to retirement this can also help you scale back on work, pay for travel plans or a child’s wedding. Depending on your goals, a guaranteed return and regular income through interest may be more important than long-term yield.
So how much cash is enough?
To work out the right amount of cash for your portfolio, add up any expected ‘big expenses’ for the next two years if you are close to retirement1. If retirement is still some way off, just put aside enough to cover all your loan repayments for one year as a safety net in case of market downturn or job loss. Of course, you can hold more of your portfolio in cash if your risk appetite is low.
A smart investment portfolio will have some exposure to growth investments, as well as defensive strategies. This gives you the potential for faster growth along with certainty of return.
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