We frequently encourage people to stay invested where they can because timing the market is notoriously difficult and, generally, your returns will be higher if you stay invested over the long term. But it is still important to have a proportion of your portfolio in cash, both to meet a need for emergency funds and to provide you with diversification and liquidity. With classic safe-haven assets now looking expensive, the question of how much cash to hold has grown especially urgent.
The amount of money needed to cover emergencies depends on your investment time horizon. If you are retired and depend on your investment portfolio for regular income, you should have up to two years’ worth of spending money in cash to avoid having to sell assets when markets fall. If you have a very long time horizon, you might be comfortable with having three to six months’ worth of spending money to cover unexpected events such as redundancy.
Leaving aside cash used for emergencies, Adam Drummond, regional director at Rathbones, says a client with a medium-risk portfolio would currently hold about 4 per cent in cash. His view is that it is not worth taking profits on equities in anticipation of falls because trying to time markets is a “dangerous game” with prices moving so quickly, making it easy to get caught out.