Portfolio management

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14. The role of cash

There are times when cash burns a hole in your pocket. You feel an overwhelming urge to spend, even though you can find nothing worthwhile to buy.

Passive investors are unlikely to feel this way, since they tend to be the patient type. But active investors and traders may well be prone to this temptation. If you are one of them, the best way for you to cope is by disciplining yourself to follow strict rules for buying and selling. Otherwise, you are likely to feel fidgety whenever you have spare cash in hand, and wind up doing something foolish.

There are other times when you may cling on to cash because you are too scared to buy. This usually follows a crash, or a prolonged slide in the market.

You should consider remaining at least 50% invested in shares and/or bonds. Indeed, you may consider having 95% invested nearly all of the time. Otherwise, you may be likely to miss out on major upward moves while standing nervously on the sidelines.

But no matter how hard you try, you will almost always have some cash sitting in the portfolio. It may come from contributions, dividends or share sales. This is fine, so long as it does not exceed 5% of your portfolio. It helps you to pay brokers' management fees and to make preliminary purchases of any promising new investments you may come across.

Once your spare cash gets towards 10%, watch out. You should only be hoarding money if you genuinely cannot find any good value deals. Otherwise, the lower return on cash will start to eat into your overall returns, as this calculation shows:

1. First things first 2. Should you invest before paying off your mortgage? 3. Do you want growth or income? 4. Diversification: summary 5. Diversification: Safe custody 6. Diversification: asset allocation 7. Diversification: shares 8. Diversification: sectors 9. Diversification: countries 10. Balancing your portfolio 11. What should you hold where? 12. Tips for married couples 13. Lump sum or drip feed? 14. The role of cash 15. Rebalancing your portfolio 16. What to do with dividends 17. All about bonds 18. What to do if you inherit a portfolio 19. Benchmarking performance 20. Setting up a portfolio spreadsheet 21. Conclusion

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