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Cash Allocations And Volatility In A Long-Term Bull Market

Current market conditions might lead investors to second guess how much the 'right' amount of cash is for a portfolio. Many would argue that we're currently in a long-term bull market (I would agree), so naturally cash reserves should be low in order to capture the potential for capital appreciation. However, when weeks like 1/15/15-1/23/15, where the Dow broke 17,800, and 12/9/14-12/16/14, where the Dow lost close to 5% down to 17,000 are less than a month apart, there's no wonder why some investors call for larger cash reserves in order to reduce short-term losses due to the high volatility.

Cash in a Portfolio

In order to assess how different portfolios would fare with current market conditions, I've made two hypothetical portfolios: 1) 55/35/10-6 (stocks/bonds/cash) and 2) 60/40 (stocks/bonds). I used a broad market ETF, the Vanguard Total Stock Market ETF (VTI), and an aggregate bond ETF, iShares Core Total… Read More …