A Key Lesson in The Little Book of Main Street Money

Don't overlook the value of cash in constructing a portfolio

In The Little Book of Main Street Money, Jonathan Clements explained the importance of diversification:

“Start with this brutal truth: No investment is free of all risk. Investments can usually be slotted into one of four categories—stocks, bonds, cash investments and hard assets. How much you can invest in each will depend on your goals, your time horizon, and your stomach for risk. This notition of risk, however, can be a tricky one. At times, each of the four may seem like the low-risk option. But don't be lulled into complacency. In the right circumstances, all four can go badly wrong. The good news: All four probably won't go wrong at the same time.”

It’s an excellent point. At various points in recent years, each of the major asset classes has gone through a tough period. When there’s political or geopolitical uncertainty, stocks will drop. When interest rates rise, bonds will drop. But it’s a rare occurrence when both drop at the same time.

And when stocks and bonds do drop at the same time, as they did in 2022? That’s when we’re reminded of the importance of holding cash.