Why cash equivalents in your portfolio?
 First,
what do we mean by cash equivalents? Simply, any highly secure
financial asset that is liquid, i.e. can be readily converted
into cash. This would include: savings or chequing accounts,
GICs, Treasury Bills and money market instruments (very secure,
short-term, interest-paying investments).
Although holding cash and cash equivalents may not help much
in growing your portfolio or in keeping pace with inflation,
they should be part of a well-balanced portfolio.
Why hold cash? For one thing, your capital will be secure.
And it will be liquid, which means that if an investment opportunity
were to arise, you would have funds readily available to be
able to take advantage of it.
Another reason is if you know you’ll need certain funds
within a short time – several months or even a year
or two – holding those funds in this way ensures that
you’ll have it when the need arises.
In addition, whether you’re in your prime career years
and earning an income, or you’re at or near retirement,
you should always have emergency cash reserves for unforeseen
events.
Choosing a cash strategy that’s best for you
So what's the right strategy for your cash holdings? How
much should you hold in each of the various forms? It all
depends on your financial goals and the relative importance
of liquidity and return.
Generally there is an inverse relationship between liquidity
and return – the more liquid the investment, the lower
the return. Cash in the bank earns the least, long term GICs
generally earn the most, with a wide variety of options in
between.
Keep in mind that the returns on cash, although they may
be low, can be maximized through smart management. You should
try to manage your short-term assets just as carefully as
your long-term assets. Over the long run, when you have the
power of compounding working for you, it can make a big difference
to your overall investment returns.
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