When you hear investment professionals speak of “cash,” they’re not talking about paper money in your wallet. Instead, they mean cash reserves or cash equivalents: yield-bearing instruments that offer excellent liquidity along with little risk of principal loss.
Common examples of cash include bank accounts, money market funds and Treasury bills. In today’s environment, they pay virtually no return, however. So why should you hold some of your assets in this type of cash?
* You might need funds quickly, in case of an emergency.
* You can be prepared for major expenses, such as college tuition or tax payments.
* You won’t have to liquidate other holdings when business or investment opportunities arise suddenly.
* In bear markets, when it seems risky to hold stocks, you can keep some money in cash until a return to equities is more attractive.
You generally should keep three to six months’ worth of income in cash. That’s just a guideline, though; you might need more or less, depending on your personal circumstances.