Is Cash More Important Than Your Mother?

During the go-go Gordon Gekko era of the late 1980s, I worked as an analyst on a financial magazine in midtown Manhattan. The publisher once uttered a line to me that at the time seemed appalling: “Just remember, kid: Cash is more important than your mother.”

Certainly, this statement grabbed my attention. I assumed it was just hyperbole from a ruthless Wall Street shark.

But nearly 40 years later, many of them spent analyzing stocks, I must admit there’s some truth to his statement. As I’ll explain below, cash and your mother are both important.

Numerous significant financial metrics aid in the assessment of companies, yet among them, none holds greater importance than cash flow.

While earnings certainly play a crucial role, it’s essential to acknowledge that various adjustments can influence earnings without accurately representing the company’s financial well-being. Metrics derived from earnings, such as the price-to-earnings (P/E) ratio, may occasionally lead to misleading conclusions.

The comprehension of cash flow stands as a paramount factor for investors, offering valuable insights into a company’s financial health and its capacity to generate profits.

As for individual investors, recent swings in the stock market and the ups and downs of speculative investments illustrate the benefits of holding some cash in your portfolio.

Portfolio managers have been trained to hold very little cash. In a bull market, each dollar left uninvested nips profit off a manager’s fund. In a world where these managers must prove their funds can perform better than a market index, even a small bit of cash can weigh on returns.

But consider yourself fortunate. You’re not required to publish your returns or showcase stellar numbers to entice potential customers. You can structure your portfolio in any way that generates sufficient returns and allows you to sleep at night.

The decision of how much cash to hold perfectly illustrates the combating forces of fear and greed. Fear of losing money in the stock market propels investors to hold more cash. Yet once the market throws on its bullhorns, fear of missing out on future upside sends that cash back into the market.

Like most investment decisions, the choice of how much cash you hold is a personal one. It should be based on how long you expect to hold investments, the level of expenses you hope to pay out of investments, and your risk profile.

The good news is that cash is not the dirty word it used to be. The 3-month U.S. Treasury rate is at 5.45%, compared to 4.66% last year. This is much higher than the long-term average of 2.68%. This means that holding “cash” can actually produce some well-deserved income to your portfolio.

For those willing to go further out in the investment horizon, the 10-year T-bill pays 3.96%. That may not sound like a lot but comparing those rates against potential losses of capital in the market paints these rates in a whole new light.

Government T-bills are the most conservative “cash-like” investment to own. Despite the gigantic budget deficit the U.S. runs, our T-bills are still considered the gold standard of safe bets.

If you desire more risk to boost your potential return, you could certainly investigate corporate bonds. These require much more homework and consideration. Overall corporate debt is at decade-high levels.

While it can be tempting to traffic in high-yield or junk debt, which offers much higher rates, the chance of default or a major drop in the bond price before maturity can be quite painful.

The following pie chart depicts the allocations recommended by our flagship publication, Personal Finance. These are general suggestions; you should tweak the percentages according to your risk appetite and stage of life.

In the meantime, be nice to your mother, no matter how much you have saved up. And perform a litmus test on your portfolio. If your exposure to equities makes you squeamish, consider adding some comfort cash into your portfolio.


Editor’s Note: If you’re looking for proven ways to make money with mitigated risk, I suggest you consider the advice of my colleague Jim Pearce, chief investment strategist of Personal Finance.

Personal Finance, founded in 1974, is our flagship publication and it has helped investors build wealth for nearly 50 years.

Case in point: If you had taken the initial recommendation of Personal Finance to buy Chevron (NYSE: CVX), and held on, you’d be sitting on a whopping return of nearly 3,200% (that’s not a typo).

Want to get aboard “The Next Chevron?” Click here for details.

John Persinos is the editorial director of Investing Daily.

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This article previously appeared on Investing Daily.