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Why Cash Should Be Part of Your Investment Plan

We all know what cash is; it’s the stuff we have in our wallets and pockets.

But there is a different way to look at cash in the market.

This is when you invest in things such as money market funds, treasury bills, and overnight government repurchase agreements.

There are stable value funds that can be a shorter term investment, usually found in 401(k) plans.

Here are three reasons why you should make a cash investment position a part of your plan:

One reason is flexibility.

You are able to benefit from opportunities if you have a percentage of your portfolio in cash.

If you want to slightly outweigh or underweigh some asset classes in your portfolio, cash allocation could be helpful.

By moving your asset allocation 5% to 10% in one direction or the other, you could add value when you’re right about an investment pick.

Cash positions are flexible also when you need to pay investment fees or re-balance your portfolio.

Second reason is liquidity.

You never know when an emergency will arise and you will need your money fast. This could range from health problems to losing your job.

Cash allocated in your portfolio could also pay for a wedding, college money for your children, or a vacation. You never know what urge you will have to spend your money on, and it is better to be able to have it when you want it or need it.

The last reason is stability.

You want to reduce risk in your portfolio. Bonds have been a good choice for this because they perform differently in the same market conditions than a stock would.

Cash investments are even less like stocks and are less volatile than bonds on average.

Yes, bonds can give you the potential for higher income, so proportioning your portfolio into cash and cash investments can stabilize it overtime.

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