Let's shed some light on a usually overlooked part of any good portfolio: Cash.

I see many people playing around with stocks and crypto but not enough of them actually pay attention to a good cash ratio.

Time for some education on this matter!

Disclaimer

I am no financial advisor, and I can not give you any accredited, certified, or verified advice.

I only happen to be a software engineer who invests himself and worked in finance long enough to know a thing or two.

I just write about my personal experience.

The Issue

Many people that go into investing spend their money to buy assets with it. They buy stocks, they buy crypto, they sometimes even try to get into derivates (like options or futures).

If you have recently gone into investing your money in the markets, did you actually keep some cash aside? If not, you might miss some great opportunities.

Yes, this cash doesn't generate any interest but it can be used more wisely as we will see.

Why Cash At All?

You might ask yourself why you want to keep some cash when every other asset class like stocks or cryptocurrencies can generate more money while interest rates for cash are sometimes even negative these days.

This question is a good one to ask and we are here to answer it.

Cash is liquid. It is actually the most liquid asset in your portfolio. Liquidity describes the ease with which an asset or security can be converted into ready cash without affecting its market price.

Cash is the prime example of this description. It is already, well, ready cash.

By keeping a certain ratio of cash in your portfolio, you can react to unforeseen circumstances more quickly. You also reduce the overall risk of your portfolio.

The Role Of Cash

In times where interest rates are high (does anyone still remember?), having cash in your bank account or in a savings contract (accessible relatively fast) makes sense. It generates some money and can be put into action quickly.

It ensures that you have funds you can access when you need them. If your car breaks down and you need to repair it, you can take that cash and pay those bills with it.

If the markets turn volatile, cash has a psychological effect. It ensures you stay calm.

You know that even if your assets lose value quickly while you are in for the long game, you'll still be able to pay unforeseen bills with this cash or buy stuff with it. It becomes less likely that you feel forced to sell assets at a loss because of your fear.

In times of high interest rates, you should keep more cash. It reduces your overall portfolio risk and still makes you some money. That money won't be as much as you can make with some other assets but it's relatively risk-free. You shouldn't underestimate this.

In times of low, no, or even negative interest rates, cash doesn't have that much of a monetary effect, however.

It still has the psychological effect to keep you calm but it doesn't generate any money for you. In those times, you should lower your cash rate.

You'll have to take a higher risk to make up for the missing interest. This is still up to you and you should always only risk what you can afford to lose but it's still a valid strategy to invest more into the markets when ready money can't generate more money itself.

Btw: One good rule of thumb is to keep at least 3 monthly salaries as an emergency fund. Better even more. This money should not be touched unless really necessary. A new Apple Watch or iPhone is no emergency, just in case you wondered.

Using Your Cash More Wisely

Every portfolio comes with a deposit and a clearing account. The deposit account holds your assets, the clearing account your cash. The latter is used to pay for your orders and to receive the money you earn when selling assets.

The clearing account is usually also the account used to pay your fees.

Especially today, with low to negative interest rates, it can make sense to move some of your cash from your bank account over to your clearing account.

Many neo brokers (non-traditional brokers with lower fees, sometimes smartphone brokers) do a lot to ensure that this clearing account stays as free from negative interest rates as possible. Sometimes traditional brokers offer this, as well.

By having quickly accessible money and by maintaining a lot of willpower, you can use a portion of this cash to quickly react to the markets. The money in your clearing account is instantly accessible. You can buy assets with it directly.

This is faster than first transferring money to your clearing account which might sometimes take a day or two. This is too slow to react to short-term market movements.

When assets dip, you can use some of this cash to buy into an asset which you expect to rise again. You can also use it to buy more of a position when prices fall.

You shouldn't view those buys as long-term investments but rather as a chance to make some short-term gains.

When the prices are up again, you sell the assets you bought during a dip and leave that cash in your clearing account once again.

If you manage to follow this strategy, you can potentially get better performance than if you didn't react at all and simply keep your cash.

Once again a word of advice: You need a lot of willpower to not pump all your cash into the markets because you think you spotted a chance. A hint: This is rarely the case.

Your short-term investments during dips should not last longer than a week, two at most.

After that, you should liquidate those assets again to get your cash back. There might be another chance coming soon that you can't take if you simply hold those assets.

How To Use Cash In Crypto

The same rules that apply to a portfolio that is aimed at the traditional markets apply to crypto investments, as well. Keep some cash aside. A portion of this should be investable when an opportunity opens up.

Cryptocurrencies also include stable coins. Those coins are directly tied to a FIAT currency like USD.

You can usually buy other coins with stable coins, as well, so you can buy Bitcoin with BUSD/USDT, ETH with BUSD/USDT, and more.

Crypto exchanges like Binance offer you another opportunity to use your cash: flexible and fixed earnings accounts.

At the time of writing this thread, Binance offers 5.05% APY for flexible BUSD (a USD stable coin) and 5.79% for USDT (another USD stable coin) savings.

The rates for fixed-term contracts (ranging from 7 days to 90 days) are even higher.

Flexible earnings can be withdrawn at any time. This means while you keep your cash on your account, you can generate interest rates that are way higher than for your traditional bank account.

The portion of your cash you want to keep for short-term opportunities can be withdrawn and invested into other coins pretty fast. When you realize your gains, you can put them back into the flexible savings account and wait for your next opportunity.

For crypto, the strategy is not completely risk-free but you can consider it near a few % at most.

Before You Leave

This thread is an experiment to post something I usually don't talk about that much because it doesn't fit well into the scheme of my topics usually covered. I still thought it might be valuable as I see so many people talking about getting into investing.

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