What Role Does Cash Play in a Portfolio?
Many investors consider their investments as long-term, meant for major purchases five, 10, or 20 years down the road. Sometimes, emergencies or short-term needs arise that you need to be prepared for. This is where cash investments, such as money market funds and Treasury bills may fit into your portfolio.
An investment in cash may lower the risk potential of your overall portfolio. In times of market instability, having that cash position may reduce the volatility your portfolio experiences.
These investments may also be used to address short-term needs, those within the next 12 months. As you approach your long-term goals, it may make sense to begin transitioning your assets into more conservative investments.
Generally, financial advisors recommend keeping three to six months worth of salary on hand in case of an emergency. Money market funds and other cash investments may be suitable for this type of investment. If you find it difficult to maintain that amount of money in a emergency account, it may be useful to at least set aside a smaller amount to be prepared for the unexpected.
An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market fund.