“What You Need To Know About Your Cash Position But Probably Don’t” hen it comes time to decide on how to structure your investment portfolio (also known as asset allocation) I suggest you begin by determining how much you don’t want in the market. This will most certainly be your most important asset class and will be crucially helpful in your quest to achieving market rates of return.By this, I mean setting up two accounts first: An Emergency Fund and a Major Purchase Fund. Most financial planners will advise having an adequate emergency fund before you begin any investment strategy. Where I differ is to not only have two cash stashes but help clients frame their thoughts about them and, more importantly, how they use them.Let’s look at the Emergency Fund first. The Emergency Fund is precisely what its name implies; a reserve of cash to be used when unforeseen events strike and money is needed. The most important aspect about this fund is liquidity: it must be easily accessible and never fluctuate in value. The second is the amount. I’ve read many different formulas for this purpose but have found that three to six months of your monthly household bills is adequate. But here, rather than your portfolio, is where you can express your conservative, risk-averse side. If you’re like me and somewhat of a Nervous Nelly, you can bring this amount to 9 months maybe 12 months max. Mine is 9 months because a portion of my income is based upon the stock market. When it goes down so does my income and my portfolio. The reason why you may want to limit the amount not in your portfolio is simple: the rate of return on your non-fluctuating assets usually does not keep pace with inflation. Moreover, when you factor in taxes, you are really going backward.Next, let’s discuss your Major Purchase Fund. Like your Emergency Fund, this account should also be liquid and non-fluctuating. The difference is in the amount. Think about any planned major purchases you’ll need to make in the next three years and fund this account to that level. So, if your 20-year roof is now 18 years old, put the roof cost in the fund. If the windows in your house need to be replaced soon, put it in the fund. If you’re going to Europe, paying college tuition, buying a car, anything within the next three years, put it in the fund. The reason why three years is the time frame is that the stock market is notoriously undependable in the short run. It’s very easy to see how money invested today can be worth less (not worthless) in three years’ time.Okay, here’s where the rubber hits the road; let’s say an emergency happens or it’s time to go to Europe, you will first look to your portfolio. If the market is doing well or at an all-time high you probably have investments that are worth more, or even much more, than you invested. It would be best to take advantage of the high valuations by selling high and using the proceeds to cover your emergency or your trip. Remember that stock you invested $10,000 in? Well, now it’s worth $15,000. Sell it and buy the new roof. Remember that fund you invested $8,000 in? We now it’s worth $12,000. Sell it and pay for your vacation. What’s happening here is that you are getting the stock market to pay a substantial portion of your expenses. Selling high always has its advantages even with the tax liabilityBasically, by employing this approach, you could be in a position to take advantage of the market when it’s up but not get hurt by the market when it’s down.This is why the amount you don’t have in the market is just as important as the amount that you do! Scott J. Menta, CFP, CLU, ChFCScott Menta has helped many people make decisions through a structured planning process that focuses on meeting long-term goals. As a CERTIFIED FINANCIAL PLANNER™ professional at Barnum Financial Group, Scott has published numerous articles offering insights and guidance to individuals looking to create and manage their wealth. He can be reached at firstname.lastname@example.org or 1-877-GO-SCOTT.This article was prepared by Scott Menta and is not intended as legal, tax, accounting or financial advice. Scott Menta is a registered representative of and offers securities and investment advisory services through MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484 The opinions provided above are not necessarily those of MML Investors Services, LLC or its affiliates.