Cash may be king when markets are volatile, but that doesn’t mean it’s without risks.
In troubled times, financial advisors may recommend that investors raise their allocations to cash equivalents, which include vehicles such as Treasury bills, insured fixed-rate certificates of deposit and savings accounts.
There are good reasons for doing so.
Cash, which is presumably risk-free, protects your portfolio from losses.
It also builds reserves you can use to buy riskier assets once the market recovers.
But cash really isn’t risk-free. Investors who are uncomfortable with market volatility and therefore decide to invest solely in cash equivalents must accept the fact that inflation could potentially eat away most of their return.
That’s because the rate of inflation – which in February was at 2.6% annually, according to the Consumer Price Index – may be more than the rate of return offered by these investment vehicles. So, too much reliance on cash may result in a portfolio that cannot keep up with rising prices.
As you approach retirement, and even when you’re in retirement, it may be important to consider keeping some money in growth investments such as stocks and mutual funds.
Your financial advisor, who is familiar with your individual circumstances and goals, can provide you with more information as to what might be suitable for you.