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  • Safety Nets and Stable Values

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    One of the more common questions I get asked by my client is what to do with the cash they have sitting in a savings account making, well, nothing. I always recommend having cash in a savings account (how much is a story for a different day!) but if you have ever received a full financial plan from me, it probably had an equivalent allocation to what this article refers to as "moderate-risk portfolio." I have always loved this idea for a variety one main reason: people tend to misprice the value of cash. This goes both ways, in my experience people either have too little and want to invest way too much or have way too much.

    I disagree with the article on major idea: you should not invest your cash reserves. At all. They even prove out the reason for this: they recommend that you fund 130% of your desired safety net — knowing that when you need it there is a chance it has gone down in value. BUT combining this kind of fund with your cash, long-term growth, and other strategies can be hugely powerful. I go one step beyond what they say here. I use this type of portfolio as my "slush fund" — when markets are high we can peel off some of the gains and put there, protecting against downturns in the markets — and vice versa when markets hit bottoms. I usually have a defined target for cash — but anything above and beyond that gets moved over to this account. This is the ultimate "do no harm" account. I sometimes refer to it as a "stable value" account, and the goal is to earn what the bank is paying in interest plus inflation. Which means you have a lower risk of loss but are also growing it with inflation — keeping the purchasing power (value) of those dollars stable (hence the name, stable value).

    People tend to think of the "market" as stock market investments with lots of volatility and trying to maximize returns. And there is a great place for that in your portfolio! But you can use these kinds of investments in lots of ways.