Holding Cash is also an Investment

Holding Cash is also an Investment:-

An investment,one that you probably have as well, and one that people rarely discuss:- 'Cash'

When the market is so confusing one should have more than 20% of the portfolio in cash, and when it is hard to find stocks to invest in. That said, in my opinion cash actually is an investment, and one that has certain benefits depending on how this portion of your portfolio is utilized to balance out everything else.

Cash-investing:-

While cash, or in this case money market funds, do not generate what I consider to be a meaningful return on investment, it does generate an almost absolute guaranteed return of your investment, minus the corrosive effects of inflation.

Cash can lower portfolio volatility

However, I use cash in another way – to slow the movement of my portfolio down. In a market where I see risk, I am not naïve enough to think that I can completely avoid it. A higher cash component will slow down the movement of the portfolio – both up and down. It essentially softens the blow of a downward market.

Additionally, cash provides optionality, as in the freedom to jump on investing opportunities that might arise. I am sure that there were plenty of people who realized that stocks were cheap back in the darkest days of 2008, but they had no cash to take advantage of the opportunity.

Indeed, Warren Buffett made some of the best investments of his career acting as a lender of last resort to companies such as Goldman Sachs (GS), GE and Harley Davidson (HOG) during this period.

Staying disciplined

While I am not suggesting trying to time the market, I am suggesting that there is a need for discipline. If you have stocks hitting your target prices, do not raise your target prices, raise cash. Similarly, if you cannot find stocks to reinvest the funds in, you do not need to invest for the sake of being fully invested. As Warren Buffett would say, you can sit there all day at the plate and wait for the fat pitch if necessary.