Episode 25: Cash Asset Allocation

What is the Cash and Cash Equivalents core asset class? Besides potential diversification, why invest in very low-return CCE? How does your life-cycle phase impact cash investments? What about personal circumstances and cash flow needs? Does one’s risk tolerance impact cash holdings?

All that and more in Episode 25 on the Wilson Wealth Management YouTube channel.

“What is Cash and Cash Equivalents (CCE)? Why is it a core asset class?”

CCE covers liquid assets, usually with maturities under one year. Liquid, safe, low volatility, but also with very low investment returns.

It is considered a core asset class, due to the importance of maintaining some liquidity. CCE is very useful for emergency reserves. As well as short-term financial objectives, cash outflow requirements, and to have on hand for investment opportunities that arise.

For additional detail on CCE, please refer to “Cash and Cash Equivalents”.

“What are the CCE considerations for those in the Accumulation life cycle phase?”

Accumulators tend to be relatively young, just starting their careers. With little wealth or CCE on hand.

While CCE provides little return, there are reasons why Accumulators need CCE in their portfolio. Compared to the other life phases, in relatively higher percentages of the asset allocation.

“What are the CCE considerations for those in the Consolidation phase of life?”

Consolidators are typically older, in the prime of their careers and earnings. They have some wealth accumulated and cash inflows should cover recurring outflows. Consolidator cash requirements are much different than for an Accumulator.

However, CCE still is important. In meeting short-term financial objectives, such as buying a new home or paying for a child’s education. Also, in this phase of life there are often investment opportunities. It is useful to have liquidity on hand to take advantage.

“What are CCE considerations for those in their Spending phase of life?”

CCE issues for Spenders also differ from Accumulators and Consolidators.

Spenders are close to retirement and want to enjoy life. They probably have wealth accumulated, but may no longer have employment income to increase their capital. They may wish to increase their stability and portfolio liquidity, including increasing cash balances.

While some costs are no longer an issue in retirement, such as mortgage payments, other new expenses may emerge. Health care, world travel, helping finance children and grandchildren. Again, having that certainty of CCE investments is often desirable for Spenders.

“How can personal circumstances impact CCE allocations?”

Many personal issues fall under a life cycle phase. But some may be common across many phases of life.

Regardless of age, people often have short-term planned expenditures. For an Accumulator, getting married, having a baby, buying that first home. For a Consolidator, maybe a lake house or rental property. Sending a child to college. For Spenders, a trip to Europe.

There are also the unplanned costs. Job loss, vehicles that need replacing, health issues. Part of the emergency reserves is held to cover these unforeseen expenditures.

Tied in to unplanned costs can be the type of job you hold, where you live, etc. If you work in a cyclical sector, such as oil and gas, maybe you have strong employment in boom times. However, if the oil industry suffers, you may be prone to unemployment. If you live in the Caribbean, maybe you run the risk of hurricanes. That can also impact employment or repair costs.

“How does one’s risk tolerance impact the CCE allocation?”

Some people have a high risk tolerance. They will want the bare minimum in CCE, due to its low returns. If there is an actual problem, they will figure it out then. For now, not a consideration.

Others may want to have more than might be necessary in CCE. They sleep better knowing all possible problems can be covered.

Where you are in your life phase, your personal circumstances, and personal risk tolerance, can all impact the amount you allocate to CCE. There is no “one size fits all” for CCE. Consider your unique situation and allocate based on that.

For more information on this section, please read “Life Cycle View of Wealth Accumulation”, “Asset Allocation: Cash (Part 1)”, and “Asset Allocation: Cash (Part 2)”.