By Charles Mason, Mason and Associates
Many of us like seeing the numbers add up in our bank accounts. It makes us feel secure, knowing that we have cash ready and available should we need it. But could keeping all that cash in your account be keeping you from greater returns in the long-run? Unfortunately, yes.
When your cash is sitting on the sidelines, you are not making the most of your investment opportunities. But if you put your idle cash in play, you can significantly increase your portfolio returns and overall wealth.
How Does Idle Cash Build Up?
Idle cash can build up in multiple ways. Young professionals earning more money than they are used to can let cash pile up in their savings because they don’t know how to make it work for them. Experienced investors may not even realize they have idle cash building up if dividend payouts from their investments aren’t automatically reinvested. Cash from passive revenue streams, such as rental properties, may not be integrated into your investment portfolio and could be actively dragging down your return potential.
Regardless of where the cash is coming from, having too much of it sitting idle in your portfolio is not a wise financial strategy. But how do you know how much cash is too much? Since no one wants to be without money in an emergency, it’s advisable to have at least three months worth of readily available funds to cover everyday expenses. Besides your emergency fund, the amount of idle cash in your portfolio should be limited.
Knowledge is Power
According to the CFA Institute, portfolios of actively managed funds typically carry a cash position of about 5%, causing the funds to lose a portion of the long-term equity premium. Do you know how much idle cash you are carrying? Evaluate your portfolio as soon as possible, because the excess cash sitting in your savings is losing the fight with inflation.
Inflation has driven up costs and the value and purchasing power of $100 today is very different than that of thirty years ago. Cash has a near zero expected return, so holding onto excess cash for the long-term is like throwing it away. So what do you do with the extra cash? How can you reinvest it so that you maximize its return?
A Better Alternative
At Mason and Associates, we strive to find the best way to put your money to work and ensure that your investments are aligned with your current needs and future goals. Whether you are saving for your child’s education, strengthening your retirement accounts, or wanting to purchase a home, we want to see your investments reach their potential.
The cash that’s sitting in your checking or savings account yields little to no interest, so if you need cash readily available, consider investing in short-term securities. These type of investments can be liquidated in less than a year but earn better returns than money collecting dust in your savings account.
Municipal bonds, real estate, and savings bonds are all excellent long-term investment options if you are in a position to limit access to your funds for an extended period of time. These types of investments require commitment but can be lucrative if held until maturity.
How We Can Help
If you think you are carrying excess cash in your portfolio, we can help. Our team can show you the potential returns that could be lost by holding cash long-term. We also assess your portfolio allocations to help you determine the most prudent investment strategy to leverage maximum profits from your cash.
Charles W. Mason, founder of Mason & Associates, Inc., specializes in employee benefit counseling and individual financial planning. He has over 30 years of personal financial and life planning experience. Charles majored in Business Administration at Montgomery College and the University of Maryland and studied finance while serving in the United States Air Force. Charles earned the designation of Certified Financial Planner (CFP®) in 1980 and Chartered Life Underwriter (CLU) in 1983. Charles is also an active member of the Financial Planning Association (FPA) and the American Society of Chartered Life Underwriters. Currently, Charles serves on Verdugo Hills Hospital Board of Directors as treasurer and Vice-Chairman. Charles also enthusiastically supports Glendale Community College, spearheading a recent parking development project that gained national recognition. Charles lives in Pasadena, California with his wife, Christine, and enjoys spending time with his his sons and four grandchildren.