How Much Cash Is Prudent to Hold In a Portfolio?

One of the most important assets any investor can have at any given time is flexibility; when other investors are cash-strapped or forced to re-balance a portfolio at an inopportune time, having the ability to take advantage of distressed asset sales or adding to long-term positions on weakness can be the difference between earning adequate long-term returns and impressive returns over the same time period.

Following the advice of the Oracle of Omaha to be “greedy when others are fearful and fearful when others are greedy,” one would be well-served to keep a large cash position on hand with the intent on investing selectively as market conditions change in the near to medium-term.

With many analysts and economists predicting a significant period of low returns at best, and a severe market correction at worst, piling up cash with the intention of waiting to deploy it may be the best way to go for investors with a long investment time horizon.

To put Mr. Buffett’s cash position in perspective, it is estimated that he has nearly $100 billion in cash available to be used right now, with a market capitalization of less than $450 billion, culminating in a cash position of approximately 20% in a time when many other asset managers are rushing to invest cash in equities instead of earning near-nil returns on balances sitting in investment accounts in the hopes better opportunities will arise.

Following Mr. Buffett’s advice may be the difficult thing to do, however, accumulating a 20% cash position as a rule of thumb intoday’s environment certainly seems like the prudent thing to do.

Invest Wisely, my friends.