Whether you are evaluating your current portfolio or looking to make a decision on where to invest new money, you will be well-served by making your decision based on three pillars of investing:
Everyone obviously wants their rate or return on investment to be as high as possible, but often individuals don’t properly identify what their needs are. Someone who wants to retire in their mid-50s with little or no savings will probably need to invest a portion of their assets in speculative options that give them the opportunity to achieve returns greater than they could get from bank CDs. On the flip side, if you have your income needs met through Social Security or a pension and you have plenty of savings, there is less of a need to achieve higher returns with riskier assets.
Safety can mean different things to different people. Generally this is money that cannot lose value. This can be achieved through bank savings accounts and CDs, guaranteed accounts through insurance companies, or even US Debt (e.g. US Treasury Bonds). It’s a good idea to know at any given time what percentage of your assets are at risk and how much is protected.
Having a portion of your portfolio accessible at any given time is a key component to structuring you investment portfolio. Liquidity allows you to provide for yourself during times of employment, take advantage of opportunities when they present themselves, and protect other assets from a forced-liquidation at inappropriate times.
Recent market fluctuations accentuate the need for liquidity. Opportunistic investors often look to make stock purchases of companies whose stock price has fallen dramatically due broader market movements as opposed to underlying fundamentals. You must have liquidity in order to do this. Also, individuals in retirement need enough accessible cash to meet monthly income needs which will allow their current investments to “breathe” during sharp market downturns as opposed to redeeming during a down market cycle.