After college, I had an urge to go on a big adventure. We were in the early days of the global financial crisis and the supply of traditional entry-level jobs and paid internships had evaporated. So, in the middle of that economic storm, I decided to move to South America and become an English teacher.
My mom was not especially excited about this plan, but she saw my determination and excitement and did not want to get in my way. When she dropped me off at the airport, she gave me a big hug and handed me a $100 bill. “This is for emergencies only,” she said. “This is not beer money. Keep this bill with you and it might help you get out of a jam.”
As I set out on my adventure, there was something comforting about having that $100 bill tucked safely in my wallet. Even though I had a credit card and some savings, having that $100 gave me a feeling of comfort and security. If all else failed, at least I would have that $100.
For many of us, cash equals freedom. Cash gives us a feeling of readiness and flexibility. Obviously, $100 in your pocket will not solve everything, but it does provide a sense of preparedness. Having some cash on hand gives you a feeling of control in an uncontrollable world.
When it comes to designing an investment portfolio for retirement or developing other long-term goals, it’s important to plan for the unforeseen. For the same reason that I felt more confident knowing that I had $100 in my pocket, we recommend clients utilize balanced portfolios with stocks, bonds, and cash. By balancing a portfolio between assets like stocks and more stable assets like bonds and cash, investors can feel more prepared when the next bout of volatility arrives.
There is no way to accurately predict what the market will do next week, month, or year. Because of this inherent uncertainty, a good strategy is to focus on what we can control: portfolio allocation, emergency reserves, and spending level.
Just like keeping cash in your wallet for emergencies, having a balanced portfolio is an implicit acknowledgment that you might get into a jam at some point. In those situations, having some flexibility built into your plan is critical. By focusing and preparing for what we can control, the unknown becomes less scary.
Fortunately, I never had to use that $100 bill, but I still carry it with me for the same reason I did back then. We never know what will happen next, so it makes sense to prepare for uncertainty and plan accordingly.