Cash in your portfolio? It's nothing to feel guilty about

May 14, 2013

The Dow Jones Industrial Average and the S&P 500 have been hitting record-high levels this year.

Many investors retreated from the stock market a few years ago and have cash sitting on the sidelines. Are you feeling pressured to invest?

Financial commentator Greg Heberlein says there's no need to rush back into the market.

In recent years, one of the premier questions individuals have struggled with is what to do with cash.

Stocks, bonds, real estate, precious metals? All have had unusually substantial ups and downs in the past five years. Many have stuffed their growing cash piles under their mattresses, hoping for an epiphany, or rising interest rates.

With the rapidly advancing stock market, investors who fled in 2009 are reconsidering their absence. That’s OK. But you don’t want to dive in with both feet.

Signs of a rich market are materializing. Brokerages once again are holding investment seminars, telling their guests that almost all signs point up. Newspaper headlines about the rising market are getting bolder. More and more market watchers are turning even more bullish.

The market is a battle between bulls and bears. When one side has a big lead, it’s time to consider bucking the trend.

Does that mean stay away? No. It means exercise a little caution.

Stick with conservative stocks paying healthy dividends. Ease your way back into the market. Put some in now and invest the rest at intervals down the road.

Why does that make sense?

First, you’re guarding against a sudden reversal. Second, the biggest moves in stocks – up or down – come at the outset of a run and at the finish. Investing gradually, after stocks already have soared so much, doesn’t necessarily mean you’ll miss a giant jump.

If you are adept at managing real estate, that’s a good place for cash. But gold, silver and other commodities are best traded by the pros.

Bonds?

The chance of inflation grows. If you plan to hold short- to intermediate-term bonds, 10 years or less, any damage should be minimal. But bond funds, for complex reasons, are even more risky.

So what about cash? Cash has been the villain. Why hold cash when typical savings instruments return almost nothing? Everyone should have cash for emergencies. Enough to cover six months is the rule of thumb. We still face some headwinds, so tucking away even more works, too.

For those who aren’t significant investors, now is the best time to avoid stock and bond markets you don’t understand. Contrary to some financial minds, it is not a crime to hang on to money. Inflation penalizes cash, because prices rise faster than cash can earn. But inflation does not rise overnight. It comes gradually.

The nervous and the naïve should think one thought: Cash is king.