This post originally appeared on The DIV-Net. I must admit, I wish I had more cash in my investment portfolio right now so I could diligently put it to work into this ever tanking market. It would allow me to continually take advantage on days like Monday when the Dow dropped some 250+ points and the total stock markets are in shambles. [ad#tdg-embedded]
Keeping some cash in your portfolio at all times allows you to do one thing: take advantage of the market drops when they happen. I know this may reek of market timing, but here is how I tend to manage my portfolio. Each month I contribute a set amount of cash into my portfolio and invest into the assets that a require topping based on my overall asset allocation. This happens automatically no matter what. The funds come automatically out of my bank account and into my brokerage account each and every month when it is put to work. I invest this money no matter what.
However, I also keep a small percentage of my portfolio in cash at all times so that I can invest additional funds when we see larger than normal market drops. I never know if I am buying at a bottom and usually the market goes even lower after I put this money to work, but catching these drops is nice when they happen in the long run.
There certainly is an argument for keeping all your money invested at all times. It is easier to invest this way as there is no guessing on market direction and it takes any emotion out of the equation. However, I think it is also wise to hold onto some extra cash for situations such as Monday when things really go bad. It allows you to act quickly and buy more! I suspect in the long run investing on a day like this will pay off.