Are you holding too much cash?

by Kristina on February 16, 2015 · 2 comments

Do you have too much cash? It seems like a funny question but the truth is if you have too much cash you're not making your money work for you!Good morning Dinks, let me ask you a question.  Did you receive your end of the year investment account statements?  How are your investments performing – as you hoped they would?  If your investment returns are less than up to par don’t blame the market, maybe you just aren’t fully invested.

When clients call me and ask why they haven’t made as much money as they hoped the first thing I tell them – before explaining how the market works – is to look at their asset allocation.  If the market performed well and your investment performance doesn’t match maybe it’s because you have more cash than needed in your investment portfolio.

Yes it’s your financial planner’s job to make sure you are invested in the best possible options, but sometimes these things are overlooked.  If one of these options sounds like you then maybe you’re holding too much as in your investment portfolio.

4 reasons people have too much cash:

They forget to invest.  Don’t get me wrong cash has its place in an investment portfolio but they key is to find the perfect proportion.  Cash provides liquidity but at the same time it also provides a low rate of return.

Sometimes people place a contribution into cash because they don’t have the time right then and there to choose an investment.  That’s OK for the short term but leaving too much cash for more than a month is just hurting your potential returns.

They don’t reinvest dividends.  If you invest in stocks or mutual funds that pay dividends make sure to set the distributions to reinvest.  Sometimes people have the dividends paid out to them if they need the income.

If you don’t need income from your quarterly or annual dividends advise your financial planner to have them reinvest to buy more stocks or units of mutual funds, this way your money keeps working for you and you won’t be losing out.

They can’t make a decision.  Are you one of those indecisive people who think every option is the best one?  I am one of those people, hence I’m a balanced investor.  I invest half my money in low risk income such as bonds and the other half in higher risk investments such as equities.  Whenever I make a contribution into my retirement account I always make sure it’s split half/half.

If your investment strategy is more complicated than mine try to make a decision on how you want to invest and if you can’t make a decision talk to your investment advisor before you make the deposit.  This will give you time to mull over the options as oppose to making an on the spot decision.  We all know that “I’m just putting it in cash temporarily” means it will probably be there for a very long time.

They don’t understand the options.  Risk is the number one reason why people hesitate when it comes to investing.  They hear horror stories about their neighbor’s brother who lost his pension in the market and they’re afraid the same thing will happen to them.

What most people don’t understand is that for the exact same thing to happen they would have had to invest in the exact same investment on the exact same day as your neighbor’s brother.  Since you are hearing about the incident after the fact what are the odds of that? Slim to none.

There are several – thousands – types of investments available out there.  Don’t limit your potential returns because you don’t know your options.  Not all investment options are high risk, there’s really something for everyone from a first time investor to a grandma collecting social security.  You just have to find the right option for you.

 



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