Cash Allocation in Typical Portfolio

[illiquid]

New member here, lurked on the forums and have read MMM from time-to-time. Strong believer in living simple and enjoying social activities vs. material things.

On to my question, what do you think the optimal cash allocation is for a portfolio? I've searched on Google and the forums, but have not found much advice. Assume, I continue working for the next 5 years with a biweekly paycheck, so I do not necessarily need cash on hand. Most of what I read is to keep the amount low and invest the rest in either the stock market or real estate.

Current Situation:
60k checking/savings
250k in stock market (betterment - mixed basket of stock (70%) and bond (30%) etfs)

Should I just put the rest of my income, after living expenses, straight into the stock market? Any other investment strategies or ideas?
I am also thinking of reducing the checking/saving balance to maybe just 25-30k.

[George the original one]

You currently have 19% of your liquid net worth as cash. Traditionally, 10% cash is considered the norm. For myself, I don't like having more than 3 months living expenses as cash, but I like to think I'm more comfortable with net worth volatility than the average person.

[workathome]

George is right. The B&H portfolios I've heard of range from 0%-25% I think Permanent Portfolio is the only one I've heard of having 25%.

(The only exception would be some active strategies using momentum/trend. These can hit 100% cash when all assets fall.)

[bad_LNIP]

I typically don't carry much cash at all, and I think now in this low interest rate enviornment it is even more dangerous to sit in cash/have your cash eroded by inflation.

With 60k cash, you are going to lose 12-1800/year in inflation purchasing power, every year or at least $100 a month. That is a real, not changing risk, so I think you have to get some kind of return on that money. If you put it in a CD making 3-4%, that is one thing, but those days are long gone and don't seem to be coming back anytime soon.

I am a big fan of closed end funds, as they pay monthly dividends and typically have lower betas although some sectors/segments can have some larger than normal volatility (ie real estate CEF's during 2008). That said, at least you are compensated for the risk.

What is the purpose of the cash? How old are you? If you are waiting on a pullback in the market or have some planned use for it, that could make sense, but that is a LOT of cash on hand.

[workathome]

You might find this interesting

http://www.researchaffiliates.com/asset ... rview.aspx

[illiquid]

Thanks everyone for all the advice so far. Didn't expect so many responses so quickly.

What is the purpose of the cash? How old are you? If you are waiting on a pullback in the market or have some planned use for it, that could make sense, but that is a LOT of cash on hand.

No real purpose to the cash. I usually just use credit cards / auto bill-pay for everything. It's probably just that I didn't grow up with much money, so having actual cash rather than stock gives me some type of feeling of accomplishment / safety / sleeping better at night. I'm currently 25, and I don't plan on buying a house or getting married soon. Maybe an income-producing condo in the near-future.

[Ydobon]

I keep enough cash for 3 months of expenses + any known planned expenses for the year (insurances, taxes etc.) Cash is shrinking as a proportion of our NW every month, perfectly happy with that.

[IlliniDave]

This is just my way of looking at things, but for an "investment portfolio" I like a cash allocation of zero. But I'm also a believer in old-school emergency funds, which I consider as separate from my investments. The amount of cash I have at any one time is based on covering living expenses for X amount of time (I use a year, the more typical advice is 3-6 months), plus any "saving" I'm doing for planned future purchases. I could easily reckon my emergency fund and sinking funds as part of my investment portfolio--many people do--I just choose not to.

[Dragline]

Cash serves a couple different functions. One is to be readily available for expenses in case of an unexpected loss of income or expense. The other is to diversify a portfolio.

Unless you have a decent low interest credit-line (like a HELOC), you probably want to have 3-6 months of expenses available in cash. On the investment side of things, it depends on you overall investment strategy. A value-based strategy (buy low, sell high) needs to have a decent chunk of cash around for the buying part. An income-based strategy -- buy and hold forever and collect dividends and interest -- probably does not. 60K out of 310K seems like a lot.

[A Life of FI]

I think you should delete the first two letters of your forum name