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What Are The Advantages And Disadvantages Of Holding A Large Reservoir Of Cash?

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Advantages of Cash Investing

The primary advantage of cash is preservation of capital.  That's a fancy way of saying cash is a very safe investment.  If you place you money in Money Market Funds or Certificates of Deposit then you might even be covered by the Federal Deposit Insurance Corporation, which means your deposit is insured against loss.

Another advantage of cash is that it prevents you from liquidating assets from other classes - such as stocks or bonds - when you've got a large expense coming up.  The last thing you want to do is have to sell a portion of your stock portfolio during a bear market so you can pay for your daughter's wedding.  Holding cash is a simple way to meet these types of financial obligations.

Cash investments are also extremely liquid assets - that means they can be quickly exchanged for products or services we need. In fact, in most cases all we need to do is make a simple withdrawal from an account to have immediate access to our money.

Disadvantages of Cash Investing

On the other hand, the primary disadvantage of cash has to do with the overall return on investment.  The higher rewards in life usually go to those that are willing to take greater risks and that means that relatively safe investments such as cash will provide relatively low returns.

This is one of the reasons that many investors spend so much time trying to figure out how much cash they need on hand.  Investing is like putting our money to work for us and if too much money is sitting around idle then we cannot help but feel that we missing out on greater returns.

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