While holding cash can keep a portfolio from plummeting — cash doesn’t move in any direction, of course — that’s not why investors should use it as a volatility-mitigating tool. Rather, it should be used to help bring a portfolio back in balance, said Mitch Goldberg, president and CEO of ClientFirst Strategy.
If the equity portfolio of a portfolio loses value, resulting in a higher weighting to bonds, then you can take some of the cash you have on hand, buy more stocks and put your portfolio’s asset mix back to where it was before the market dropped.
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Goldberg will hold as much as 30 percent of his portfolio in cash, but he’s also happy to go to zero if he can put his money to work.
“Cash is part of a long-term strategy, but it’s more of a short-term tool,” he said.
Ultimately, if you do want to smooth out those ups and downs, you’ll need to be diversified, hold at least some uncorrelated assets and make sure to invest according to your risk tolerance.
If you’re afraid of losing money but you’re heavily weighted to stocks, then no matter what happens, you’ll panic anytime the market falls.
“Risk and return go hand in hand,” said Weiss. “It’s impossible to eliminate all volatility, no matter how well the portfolio is constructed. You need to know your risk tolerance so at least you won’t be surprised.”
— By Bryan Borzykowski, special to CNBC.com
