The market is up, way up. For me that is a sign to take a little off the table. Having nice wad of cash feels good. It is reassuring to have a little cash on hand but take care not to cash out too much. Diversification is as important here as elsewhere. Cash is but one investment in a well diversified portfolio.
Today, my money market fund (TDB8150) is paying 2.3%. Sounds good but keep in mind that inflation is running around 1.7%. The spread, .6%, may not sound like much but it is still much better than parking your money and watching it lose buying power thanks to inflation.
Let's compare cash to the TSX. The last decade has been a bit of a dog. The Canadian market has not performed nearly was well as the U.S. one. Still, it managed to return approximately 3.0% annually for the ten years in question.
This 3% annual growth in the index value does not include dividends. Include dividends and the total return—which combines both price appreciation and dividend income—brings the total return closer to 6.0% or a little more.
Converting some of your equity winnings into cash has the following rewards:
- A major expense such as a roof does not pose a threat to your financial well-being. You have the cash to cover it. You will not be forced to sell equities into a falling market.
- Cash left as cash often pays next to nothing -- maybe even nothing. Moving one's cash to TDB8150, often protects your cash from inflation while leaving a little extra in the mix for you.
- Having a nice cash cushion enables you to pick up the stock market bargains appearing during a bear market. Buy low is only a six letters mantra unless you have the cash to fulfill your "buy low" goal. Warren Buffet likes to hold a fair amount of cash for just this reason: to be able to buy low when the opportunity arises.
- A portfolio is more diversified when a meaningful amount is kept in cash.
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