The Role of Risk-Free Assets in Your Long-Term Portfolio

The Role Of Risk Free Assets In Your Long Term Portfolio Splash image

What is a risk-free asset, and what role should it play in your portfolio?

That’s one of the first questions many investors ask when struggling with the asset allocation question.

In today’s market environment, the sudden and steep drop in the stock market as well as anxiety over the future of the banking industry and the financial health of long-term bond issuers have all caused a massive rush to—and an exclusive focus on—“risk-free” assets.

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Discussion

John from Nebraska posted over 2 years ago:

Bills, notes, bonds--include in that zero coupon bonds, when held to maturity, and laddered, can provide some security in terms of return to your portfolio. Changes in interest rates can affect the value of what you get on the return, but the investor has a set rate of return, unlike stocks. This makes for a more predictable part of the portfolio. I'm hoping that, like stocks (through direct purchase, funds and ETFs), this market will become more easy for the individual retail investor to participate in both on a cost basis and as far as access to information is concerned. Time will tell.


James from Florida posted over 2 years ago:

I keep about $200,000 in cash reserves.


Jim from California posted over 2 years ago:

I have about 18% of my investments in cash and very short term bond funds. I am worried about interest rate risk, and the role of these investments is to reduce my fixed income investment duration. I feel there are additional risks to cash as an investment. First, in cash form, it is more likely to be spent! Second, it does not keep up with inflation (effectively looses one of two percent in purchasing power per year). Personally, I don't like cash at all, and have it only because of my concerns about the probability of rising interest rates, which cause long duration bonds to significantly loose value.


Santosh from California posted over 2 years ago:

In these uncertain times having a cash of 30% is safer. We want higher returns but our economy is fragile. we (USA) are broke and so is Europe.
If austerity is imposed, we might see another deep recession. Japan is suffering from deflation for over 20 years. And no end in sight.
Unless the super-rich are willing to pay their due share of taxes, we can end up less money in the hands of middle class. If people stop investing in the stock market, billionaires cannot make money through the Wall Street gimmicks like derivatives and hedge funds. We are at the mercy of the supr-rich. It is a gambling casino for many of us.
My suggestion is play safe.


Paul from California posted over 2 years ago:

I keep three years of cash on hand, either cash or very short term bonds. If at the end or even during the year if we have experienced a up tick I will take out another year. If there is a down turn in the market I can sit on the side for three years if needed.


Joan from California posted over 2 years ago:

We're holding 2 years of cash and $186,000) in I bonds. ( Purchased in 2001.)


Charles from Louisiana posted over 2 years ago:

There was a book titled "Buckets of Money" that has provided me with my retirement allocation plan
o Bucket One had 5 years of cash and short term bonds
o Bucket Two had 5 years of longer term bonds
o Bucket Three had the remainder in equities
The approach then called for me to spend Bucket One money down over the next 5 years (this allows the other Buckets to grow and avoids selling equities during market downturns) and then you redistribute or refill the buckets a the end of 5 year.


Jack from California posted over 2 years ago:

I'm retired and keep a two and a half year supply of money on hand at all times. Every four to six months I replenish it regardless of what the market is doing.


John from Michigan posted over 2 years ago:

I keep 2 years in cash and 305 invested in income and short term funds. The rest is in ETF's that will go south for 3 years only if the world ends financially.


Robert from Illinois posted over 2 years ago:

How about that lost decade in equities?


Judith from Ohio posted over 2 years ago:

I used to keep one year of cash but now have seven, which is too much. It amounts to 20% of my portfolio. There's so much uncertainty now I'm reluctant to be fully invested, but real inflation is killing me.


Paul from Michigan posted over 2 years ago:

I think that if you have pension, social security, and investment income that covers living expenses, then there is little need for large cash reserves. As a 80 year old retiree I have 60% in fixed income (bonds), 30% in dividend paying stock, and the balance in a govt money market fund.

I use my cash reserve to fund my "rounds of pleasure".


Marlin Matlock from California posted 8 months ago:

We keep 6 to 8 months in cash. We keep the equivalent of 6 mo. in high grade muni bonds.
With the impending increase in inflation I fear that the cash will actually lose value faster than the return it is earning.


Gerald Alfredson from Indiana posted 8 months ago:

We keep 5 yrs in cash and only convert to cash on a monthly basis when the market is "up". I have a spread sheet that tells me when that is. We have a small (1 yr) amount in a junk bond fund that is part of that cash category. All the rest is in equities which is mostly stock mutual funds.


Ron from Illinois posted 8 months ago:

Over the last three months, I have been moving my bond allocation to money markets in my IRA account. I feel that with bonds losing money with rates going up, I can use this money to consider adding to equities if we have a correction later this summer. I have been 50% equities and 50% bonds. I am now 50% equities, 25% bonds and 25% money market funds.


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