Cash and cash equivalent investments,
such as money market funds, certificates
of deposit (CDs), and Treasury bills, are low-risk
investments that pay interest. Their short terms and stable
values mean they generally provide smaller returns than
the other major asset classes. But they have one big advantage — they're
highly liquid, so you can turn them into cash at any time
without a major loss in value.
Cash for capital preservation
The
rate of interest that cash investments pay is usually not
enough to offset the effects of inflation, or the gradual
erosion of the buying power of your money. So if you're
seeking long-term growth, you'll want to limit the amount
of money you allocate to cash equivalents. Nonetheless,
cash investments can play a role in a well-balanced portfolio — to
provide liquidity to meet shorter-term goals and emergency
expenses, as a holding place between longer-term investments,
or to provide a buffer against the fluctuation in value
of more volatile securities.
Professor
Roger Ibbotson, Yale University, chairman and founder
of Ibbotson Associates
New opportunities
Even if you keep your emergency cash fund stashed separately,
it's smart to allocate at least some of your investment
assets to cash, so you have money on hand when new investment
opportunities arise. Even investors who allocate their
portfolios very aggressively — say 85% or 90% stock — often
allocate the balance of their portfolios to short-term
cash equivalents for this reason.
The
rate of interest that cash investments pay is usually not
enough to offset the effects of inflation, or the gradual
erosion of the buying power of your money. So if you're
seeking long-term growth, you'll want to limit the amount
of money you allocate to cash equivalents. Nonetheless,
cash investments can play a role in a well-balanced portfolio — to
provide liquidity to meet shorter-term goals and emergency
expenses, as a holding place between longer-term investments,
or to provide a buffer against the fluctuation in value
of more volatile securities.
Professor
Roger Ibbotson, Yale University, chairman and founder
of Ibbotson Associates 