How much of your Portfolio should be kept as Cash?
How much of your portfolio is kept as cash (the safe and boring)? Or do you even edge by keeping cash in foreign currency?
- This is another one of those hard questions for which there is no single best answer for everyone. You must take into account risk acceptance and time horizon amongst other factors.
- This is a hard question for which there is no single best answer for everyone as one has to take into account risk tolerance and time perspective amongst other factors. A good guide is your ability to sleep. Sort of a gut reaction. If you can sleep with your shares proportion in your portfoliio, it's probably the right combination for you.
- One rule states that your share allocation percentage should be 100 minus your age. That is, a 32-year old should have 68% shares/32% bonds, and a 70-year old should have 30% shares/70% bonds. These percentages aren't just a rough calculation but based on historical returns. As you near retirement, you want to have more bonds as that reduces the overall volatility of your portfolio.
- In recent times, some investors have changed the above criteria to an even more aggressive '110-age' or even '120-age' (!). But what should the non-stock part of your asset allocation be? There is quite a difference between 70% stocks-30% cash and 70% stocks-25% bonds-5% cash...
- I was talking with someone recently who said they had read that one should start with 25% in each of stocks, bonds, cash and commodities and then re-base that each year so that it's always 25% for each. I certainly have all for asset classes but not in that proportion. Rebalancing regularly is essential to boost returns and reduce volatility. Without rebalancing, the benefits you hope to gain from asset allocation are greatly diminished. Actual allocation is very likely to be less important than rebalancing discipline.
- Personally I try and size each trade according to the risk and keep going as long as the money holds out. Because of my bonds and being overweight in gold, my ISA is 50% invested. My SIPP is in equities and bonds and is now less than 30pct invested.
- Whatever you decide always leave ample funds to take advantage of one-off opportunities; opportunities that rarely present themselves but are very much well waiting for!
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