I'm often asked how much cash do I have in my portfolio. Since the stock market is in a bubble, does it make sense to be 100% in cash. Actually, it depends on you.
Cash is important in your portfolio because it provides you with liquidity. If there's a stock which you like, you would want to have some cash to buy it when it is at the right price. You don't want to sell your other stocks to buy this one. It is the same thing for personal finance. If you want to buy a car, you won't sell your house to buy it, you need cash.
In my opinion, you need to keep your investment portfolio and your personal finances separately. You want your investments to grow over the long-term, if you're just going to take money out of it, it won't be compound and grow. That's why it is important to have an emergency fund. Usually, the emergency fund should be about one year of necessary expenses. For me that's about $7200.
This is a mistake that I made in the past, not having an emergency fund and taking money out of my investment portfolio for expenditures. Although, my portfolio grew by 120% over the past 4 years, my net worth is about the same since I've been taking money out of my portfolio.
I have been diversifying my portfolio, keeping some cash and cash equivalents in it, doing some arbitrage and keeping some bonds. Last year, I had a big emergency expense, I needed a new laptop and I had to take money out of my portfolio. This was the last time that I took money out of my portfolio.
Cash flow also has a very important role to play in how much cash you need to have in your portfolio or your personal savings. If my cash flow is going to increase (I'm still waiting for my first paycheck from YouTube), I'll be able to build my emergency fund faster and use the extra cash to invest. There's no use keeping cash in your personal account if you have already built your emergency fund because cash is trash, according to Ray Dalio.
Right now about 40% of my portfolio are in workouts, cash and cash equivalents, precious metals and bonds. Workouts according to Warren Buffett are all investments that require corporate actions. For example, mergers, liquidations, spinoffs and restructurings. I have some arbitrage deals in my portfolio. This is a better alternative to cash. Then, my second part of that 40% is in precious metals $GOLD . I don't want to have too much in precious metals too since they are volatile. The rest are in bonds and cash and cash equivalents.
The problem of having pure cash and cash equivalents and even bonds is inflation. Because of all the money printing, holding cash is a bad idea. If you already have an emergency fund, you don't need extra cash, it is better to invest it, unless you have a big expense coming.
How much cash do you need in your portfolio? It all depends on you. How much is your risk tolerance. Do you have an emergency fund? How much are your cash flows? The best thing to do is to have your investments and your personal finances separate. And it is very important to do your budget. Do what works for you.
You can look at great investors such as Ray Dalio and Warren Buffett. Their approach to cash differs. Ray Dalio has a team of 1500 people working for him at Bridgewater Associates where they can find great alternatives to cash. Warren Buffett, he has a $800 billion portfolio. It is very difficult for him to find great investments. That's why he needs to be in cash. Do what works for you.
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Investing in metals or metal miners might be a good idea to protect oneself against inflation, here's my full analysis of the metals:
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