A. Unless you are super wealthy, chances are, you don't have 6 month's cash as emergency fund. That's based on many surveys conducted by the likes of U.S. Trust, BlackRock, UBS, and American Express.
But do you have large chunk of cash sitting in your investment portfolio, as you are a skittish investor? If you do, don't blame yourself, if you ever experienced the following drops, it's understandable to carry lots of cash:
- Technology/dotcom stock drops of 80% (2000-2002)
- Housing drops of 35% (2005-2009)
- Banking stock drops of 75% (2007-2009)
- Equity market drops of 57% (2007-2009)
- Commodities drops of 50% (2011-2013)
Why not to put cash in fixed income? Actually that interest rate situation probably exacerbated the problem - concerned about rising interest rates in the future, investors are liquidating bonds.
So, how much cash to hold in your investment portfolio?
Warren Buffet once described cash as "a call option that can't be priced, relative to the ability of cash to buy assets".
But few investors have the discipline of Warren Buffet, when market crashes, you will end up in more cash rather than exercising that call option.
When can you do, as an ordinary investor?
My advice, carry 5% or so of your investment portfolio as cash, and deploy the rest to a mix of equities and laddered bonds (with 3-7 year durations and hold to maturity).