Making Cash Your King Can Be A Wise Move, Tough Financial Times.

From the time the market bottomed in March 2009 through today, cash has been an unloved asset, with many people complaining (and rightly so) that they are not receiving any return on their cash.

Some people have become fed up and looked at places to put their cash where they could enjoy a higher return.

Reaching for yield, however, is not always a good thing to do as the risk associated with higher cash returns can do more harm than good.

How much cash then should you have in your portfolio? Don't know? Well, it is probably one of the most important questions you should be asking yourself.

Sadly, most people don't think about it, at least not until it's needed. The truth is that the decision about how much cash to have should be the first decision you make, even before deciding how and where to invest.

Setting aside cash in a readily accessible checking or savings account serves as an emergency fund for any unforeseen cash needs. These can be for medical expenses, or to help pay household bills during a job loss, but should not be used to buy a car or pay for a vacation.

Typically, three to six months living expenses is a good guide to use as far as how much to keep.

The second reason to keep cash is to fund short-term goals. Here is where the new car or vacation can be funded. Monthly contributions from your paycheck into a bank account earmarked for these short-term goals is a good way to save without feeling overwhelmed with such a large savings goal.

For retirees needing money from their portfolios to provide for their living expenses, cash can be set aside to fund several years' cash needs. Setting aside your cash needs this way will allow you to stay invested during periods of market declines since selling stocks during a market decline is not ideal.

One way to do this is to buy a series of Certificates of Deposit with each one equal to the annual cash need. The term of the CD can match the year the cash is needed.

This CD ladder, as it is called, can help you not only set aside your cash needs, but also easily identify these cash needs on an annual basis. As a CD matures each year, a new CD can be purchased so that you always have several years cash needs set aside.

Finally, cash should be part of your investment portfolio. A small allocation to cash within your portfolio can help reduce the overall volatility of your portfolio, a benefit you'll appreciate during market declines. This small allocation to cash can also be used to fund distributions from your IRAs for those required to take distributions from those accounts.

The one thing to remember is that the investment return you receive on the cash is always secondary to the importance of principal preservation; that is, being able to count on the exact amount of cash to be available when you need it and not worrying that the principal may be less.

Cash kept in a checking or savings account should be FDIC insured. Many brokerage firms allow their clients to keep cash in a FDIC insured account within the brokerage firm. If not available at your brokerage firm, you should inquire as to what types of cash accounts exist and what insurance is in place to ensure the principal.

Howard Hook is a Certified Financial Planner and CPA with the wealth management firm of EKS Associates in Princeton, N.J.