Are the recent news reports of all-time stock market highs keeping your money on the sidelines? When you peek at your bank account and see your hard earned money stacking up in your savings, it feels good, right?
But, could keeping those extra Benjamins in your account be costing you money in the long-run? The answer is yes. When your cash is sitting on the sidelines, you are not making the most of your investment opportunities. Putting your idle cash in play can significantly increase your portfolio returns and overall wealth.
How Does Idle Cash Build Up?
Idle cash can build up in multiple ways. At the moment, one of the biggest reasons is simply nervous investors scared of “buying at the peak.” As we continue to get inundated with reports of “New All-time High for the S&P 500” (variations of these titles make wonderful clickbait) it stokes our fear of buying near the top. Actually, the real fear is buying high and then watching our hard earned money lose value soon after because it just “feels” like the market is due for a correction. The result is cash continues to build as investors wait for that “perfect time” to buy on a dip (*hint: a number behavioral biases and the way our brains are wired will trip you up).
Another way cash builds up is not knowing what to do with it. This is basically an extension of the first point. Young professionals earning more money than they are used to can let cash pile up in their savings because they don’t know how to make it work for them. At the other end of the spectrum, experienced investors may not even realize they have idle cash building up if dividend payouts from their investments aren’t automatically reinvested. Cash from passive revenue streams, such as rental properties, may not be integrated into your investment portfolio and is actively dragging down your return potential.
Whichever scenario describes you, having too much idle cash in your portfolio is not a smart financial move. But how much cash is too much? No one wants one wants to be without money in an emergency, so it is advisable to have at least 3-6 months worth of funds readily available. Other than your emergency fund, you should explore ways to limit the amount of cash in your overall portfolio.