The big problem with cash cushions and dry powder in your investing portfolio

Got a comfy “cash cushion”? Is your portfolio packed with plenty of “dry powder”? When it comes to investing, I can only wish feeling safe and secure was as simple as that.Cash feels safe – it’s got no short-term volatility.That balance in your savings account never goes down unless you make a withdrawal – right? The seeming certitude of cold, hard cash leads many investors to never question a habit of hoarding it.You should.

Carrying excess cash, whatever your “reason,” exposes you to invisible and insidious risk: Low-returning cash drags down long-term returns, risking a brutal, underfunded retirement.Let me explain – and give you tools to help right-size your coffers.Holding some cash, maybe six to 12 months of expenses, is sensible – an emergency fund.

It can make you a better investor, helping you avoid forced securities sales at inopportune times.Or, if there is an upcoming, major expense in the next several years (think: house down payment), cash set asides are wise.

Anything volatile – stocks, bonds, etc.– is suboptimal in such scenarios.Otherwise, cap your cash.Myriad studies teach asset allocation – your mix of stocks, bonds, cash and other securities – determines most of your long-term return.

Not market timing.Not stock picking.

Not perceptions of “safety”. Your goals, needs and time horizon – how long your assets must last to finance your goals – should largely determine your allocation.Generally, the longer your time horizon and more growth you need, the bigger chunk you should have in high-returning categories, namely stocks.

Maybe those taking cash flow or who vomit on volatility hold some bonds.But cash should be minimal.Why? Minimal returns.

Since good data started 100 years ago, US stocks annualized 10.3%.Gold, 6.4%.

Quality, long-term corporate bonds, 5.7%.10-year Treasurys, 4.7%.

Cash? Treasury bills – a cash proxy – annualized lowest – at 3.4%.Averaging 3.0%, inflation ate up most of cash...