How Much Cash Should You Have In Your Portfolio?

While it might be tempting to invest a bulk of all your funds so that they can generate interest, it is a rookie mistake that can cause even more problems. Here's how much cash you need to attain balance.

A friend of ours invested ₦5million of his money in a diverse range of securities. He set out the money because he felt he didn’t need it for at least another 5 years and was good to go. Unfortunately, during a downsizing in his company, he lost his job. Soon, he was forced to take a look at his investments to survive a little.

Without a doubt, cash is good and the benefit of cash and its equivalents goes beyond being able to take a dip at your investments when things go wrong.

In investments, cash means zero interest rates. This in turn means the evils of inflation will have the value of your money crashing year-on-year. As such, the question of how much cash you should have in your investments structured differently is “how much or what percentage of my portfolio should earn nothing?”

For this reason, it might be tempting to invest a bulk of all your funds so that they can generate interest. Why not just put it all into other securities so you can get something at least?

As logical as it sounds on the surface, it is a rookie mistake that has been the very reason people lose their investments.

Like in the case of our friend above, the most natural thing is to sell off part of his investments. However, it wouldn’t take long into that to discover that things don’t always work according to plan.

Depending on the investment, you might not be able to sell off when you want to and might even take a few losses in the process. You might even be forced to pay excess in taxes.

Having a level of cash in hand or at least some investments that are easily converted to cash will help you maintain balance to an extent.

So how much cash is advisable?

It is one thing to have cash and it is another to have too much cash or too little of it. The cash portion of your investment portfolio can also constitute your emergency investment fund.

As such, the rule of thumb is to have as much cash that can cover expenses for a period of at least six months. If our friend above requires a sum of ₦200,000 to meet up his unavoidable expenses, then ₦1,200,000 of the ₦5,000,000 investment should be in cash or cash equivalents.

Using a percentage might not be as accurate because our needs differ individually. Your cash reserve will give you room to cope through unexpected challenges without having to sell off your investment assets. It will come in handy when you need it the most.

Written by Lawretta Egba.