Finances in Focus


As an investor, you may find that the elements of your portfolio that seem to draw most of your attention are stocks and bonds. After all, these investment vehicles, and others derived from them, provide you with potential growth and income opportunities — which is why you invest in the first place. Yet, you also may find significant value in a more humble financial asset: cash. In fact, you might be surprised at the various ways in which the cash, and cash equivalents, in your portfolio can help you complete your financial picture.

One way to understand the uses of cash is to look at the “USES” of cash. In other words, consider the acronym USES:

—         U for Unexpected expenses and emergencies — You’ll need sufficient cash for situations such as a job loss, a home repair or an unplanned medical expense. During your working years, you should keep three to six months’ worth of living expenses in a cash account specifically designed to meet unexpected expenses. Once you’re retired, you may be able to get by on a smaller emergency fund — up to three months’ worth of living expenses, although you will need more for everyday spending.

—         S for Specific short-term savings goal — Are you anticipating a big expense —a wedding (once they become legal), a week in Palm Springs, a down payment on a new home, etc. — sometime within the next few years? If so, you’ll want to set aside sufficient cash, with the exact amount depending on your specific short-term goal.

—         E is for Everyday spending — It goes without saying that you’ll need adequate cash for your everyday spending needs — groceries, utilities, entertainment, mortgage/ debt payments, and so on. Of course, while you’re working, you will probably handle most of these costs with your pay checks, but you may still need to set aside one or two months’ worth of living expenses.

Once you’re retired, though, it’s a somewhat different story. While your expenses may go down in some areas (such as costs associated with employment such as uniforms, dress clothes or commuting to and from the job), they are likely to go up in others (such as health care). So your overall cost of living may not drop much, if at all. Consequently, it may be a good idea to set aside 12 months’ worth of living expenses, after incorporating other sources of income, such as Social Security and outside employment.

In addition, you’ll have to decide on the most efficient way of drawing on your other sources of income, including Social Security and investment accounts such as an IRA, a 401(k), etc. It’s especially important to create a sustainable withdrawal strategy for your investment portfolio because you don’t want to run the risk of outliving your money.

—         S is for Source of investment — You’ll want to have some cash available in your portfolio — perhaps 2% to 3% of the portfolio’s value — to take advantage of investment opportunities as they arise. Also, having even a small percentage of your portfolio devoted to cash can modestly improve your overall diversification — and a diversified portfolio is your best defense against market volatility. (Keep in mind, though, that diversification can’t guarantee a profit or protect against loss.)

So, there you have it: four key USES of cash. Taken together, they provide some good reasons to keep at least a modest “stream” of liquid assets in your portfolio. Speaking of which, just as Mother Nature sends out “signals” to indicate a change in seasons — falling leaves, colder temperatures, shorter days, etc. — your portfolio will frequently “tell” you when you need to make adjustments. Here are a couple of indicators you may want to heed:

Out-of-balance portfolio — Even the best stocks can lose value when the overall market is down, but if you only own stocks, you could take a big hit during a downturn and if it happens repeatedly, you may find it hard to even stay invested. After all, stocks will always fluctuate in value, and protection of your principal is not guaranteed. Yet you can at least help defend yourself against market volatility by balancing your portfolio with a mix of cash, stocks, bonds, government securities, certificates of deposit (CDs) and other investments, with the percentage of each type of asset based on your individual goals, time horizon and risk tolerance.

“Overweighting” of individual investments — Related to the point made above, you can also have too much money kept in a single investment, such as an individual stock or bond. Sometimes, this “overweighting” can happen almost on its own, as when a stock, or stock-based vehicle, has increased so much in value that it now takes on a larger percentage of your portfolio than you had intended — possibly bringing with it more risk than you had intended, too. As a general rule, no single investment should take up more than a small percentage of your entire portfolio.

Your own life may also send you some messages regarding changes you may need to make to your investment and financial strategies. Here are just a few of the milestones that may trigger necessary moves:

New relationship — Is he “the one”? If so, then you will want to consider how and when to include him (or her) in your financial life. This is especially true if you get legally manned in one of the forward-thinking states where this is already legal (like Illinois, Maine or California, just to name three).

New job — Assuming your new job offers you a retirement plan, such as a 401(k) or similar vehicle, you’ll have some choices to make. How much can you afford to contribute? How should you allocate your dollars among the investment choices offered in the plan? How can you best integrate your 401 (k) or other plan into your overall investment portfolio to avoid duplication? Also, do not forget stock options, which some firms do offer. They allow you to invest a portion of your pay into the firm’s stock, but think carefully and do some research. Just because you work somewhere does not mean they have a good or bad stock record, so find out more before you invest, which is a good idea with any stock purchase.

Impending retirement — As you enter retirement, you may want to adjust your portfolio to help reduce its short-term fluctuations and to provide more current income opportunities. At the same time, you may still need to invest for growth — you could be retired for two or three decades, and you’ll need to stay ahead of inflation.

Pay close attention to the messages coming from your portfolio — and from your life. These “signals” will give you a good idea of when it’s time to make the right investment-related moves.

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