Wise investors know that it’s a good thing to keep a portion of assets in cash-equivalents at all times, but do we really have to settle for paltry interest rates like 0.01%? Absolutely not. In this episode, I teach you how to put your cash to work without taking too much risk. With interest rates at historically low levels worldwide, you’ve got to work a little harder than usual to get a decent return and stay ahead of inflation.
Section 1: Why You Should Never Be 100% Invested in the Markets
- Cash-equivalent assets serve many purposes:
- Emergency funds
- Saving for big purchases
- Taking advantage of buying opportunities in the market
- Protecting against bouts of deflation in financial assets, ala 2008-2010
- Avoiding costly margin debt
- Reducing risk level of the portfolio
- Three “buckets” of cash:
- Emergency Cash
- Structural Cash
- Tactical Cash
- The best way to deploy that cash? It’s different for each bucket.
Section 2: What’s the Right Amount of Cash to Hold?
- It’s different for every individual
- Factors to consider:
- Personal balance sheet
- Are you primarily a: short-term trader, intermediate-term trader, or long-term investor?
- My baseline suggestions for the three “buckets” of cash
Section 3: Emergency Cash
- Top Priorities: Safety and Liquidity
- Interest? Forget about it!
Section 4: Structural Cash
- Stable value funds in an employer-sponsored retirement account like a 401(k), 403(b), or TSA
- Build a laddered portfolio of certificates of deposit (CDs) or corporate bonds
- There’s a right way and a wrong way to do this!
Section 5: Tactical Cash
- Higher liquidity and yields, but you can lose a portion of your principal in a downturn
- Short-term bond ETFs and mutual funds
- Some of my favorite funds for tactical cash
Intro music by audionautix.com