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Why hold any cash? Why not fully invest?
If you use a professional money manager or roboadviser, the vast majority, if not all, of your portfolio will typically be invested with little to no allocation in cash.
It’s impossible to accurately time the markets. Quite literally, no trader or investor can consistently pick the absolute top to sell their entire portfolio and then pick the absolute bottom to buy entirely back in. Statistics and research show that, for the majority of investors, the better strategy is to buy-and-hold quality stocks of consistent companies and/or invest in Exchange Traded Funds (ETFs) or mutual funds, holding for the long term through the market’s ups-and-downs.
However, my approach is to Buy in Stages and Sell in Stages. Rather than try to pick the top or bottom and sell or buy an entire position, I take profits when my positions rise to certain levels, and I add more money into them when they drop to certain levels. Key to this strategy is picking the stocks of quality companies with great historical track records which I believe show long-term growth potential. If you’re worried a company might go out of business, you won’t (and probably shouldn’t) have the conviction to add to the position if it sells off.
If I didn’t keep a percentage of my portfolios in cash and the markets suddenly sold off, I would have no way to add to my positions and could potentially miss a great buying opportunity. However, if I kept my entire portfolio in cash and the market skyrockets, I’ve missed out on lots of profits.
What’s the solution? Keep some of the portfolio in cash at all times.
How much cash should I hold?
Professional financial advisers typically recommend holding 5-10% of a portfolio in cash, however, the actual amount an investor holds will likely change depending on whether the market is reaching new highs or selling off.
While I am not a professional in the financial markets, I’ve been investing for more than two decades, and my technique is substantially different than traditional advisers. When the S&P 500 reaches new all-time highs, I keep a substantial amount of my portfolios in cash. In fact, as of October 2020, I currently hold nearly 50% of all of my portfolios in cash – a widely contrary amount compared to the 5-10% recommended by professionals.
Even during the -35% selloff in March 2020, I still held 43.24% of all of my portfolios in cash at the absolute bottom on March 23. Even with this substantial amount in cash, my current Year-to-Date (YTD) gains as I write this are:
- Investments in Play 2020 YTD: +28.77% (39.08% Cash)
- Speculation in Play 2020 YTD: +41.49% (62.22% Cash)
- All Investments (stock, ETFs, crypto, etc.) 2020 YTD: +18.794% (47.55% Cash)
- S&P 500 2020 YTD: +7.63%
That being said, what works for me likely won’t be precisely what works for you. Every investor is different and needs to determine the level of risk and strategic approach that suits them. This is why I always recommend investors meet with a financial adviser to help design an investing strategy that suits their risk appetite and goals for their investments.
Why does Irk hold nearly 50% cash?
Right now, across all of my portfolios (including Pandemic Portfolio and retirement ETF accounts) I’m 47.55% in cash, an incredibly high figure as most investment advisers recommend holding 5-10% in cash. The reason is I expect a market correction in the coming weeks and months.
In order to get perspective on the markets, I listen to a ridiculously large number of different advisers, traders, investors, and hedge fund managers. Across the board, there seems to be a growing consensus that we’ll see a selloff of 10-20%, at minimum, before the end of 2020.
More disturbing is the result of a study of the markets going back to the 17th century. Every 90 years, the markets see a generational selloff. The last selloff that fell on this schedule occurred in 1929 – the Stock Market Crash before the Great Depression. Robert Kiyosaki, author of Rich Dad, Poor Dad, and maker of the Rich Dad podcast released an episode called “Super Bubble” where experts outlined the coming crash and its devastating potential.
Add 90 years to 1929 and the theory suggests we’re due for a similar crash right now. According to these theorists, the 35% selloff we saw in March, while dramatic, wasn’t nearly enough to qualify as the 90-year selloff; they anticipate a 50-75% selloff sometime between now and the end of 2021!
Personally, I don’t ever fully subscribe to any one theory, so if the 90-year selloff theory is true, I will have a plan in place to account for the selloff, however, in case the theory doesn’t pan out and we instead see a standard 10-20% correction with no epic selloff, I’ll still maintain significant upside exposure by buying in stages on the way down.
In fact, the precise reason why I practice buying in stages is to protect against any outcome – good or bad. If the S&P 500 sells off 7.5%-10%, I will add to my ETFs and continue to add at each subsequent 2.5% drop with increasing quantities the lower the market drops. However, the approach I take to ETFs is vastly different to how I approach individual stocks.
For my individual stock positions, I determine the levels where I would like to add on a position-by-position basis, calculated mainly on a combination of historical levels of support and moving averages, a relatively simple technique. If an individual position never pulls back far enough to hit my target price, I either don’t add to it or I raise my price target, assuming I’m confident in adding to it at a higher level.
I regularly update my current price targets for all of my Pandemic Portfolio and Investments in Play positions in my Stock Shopping List.
Note: I do require visitors sign up for free membership to access the list so they acknowledge and agree to the fact that I am not a professional and that no one should blindly follow what I do since I could screw up and lose all my money at any point.
So, why so much cash, Irk?
So, long story long – why so much cash? With the S&P 500 near record all-time highs; a complicated presidential election process virtually guaranteed; a pandemic with no vaccine; a wave of delayed foreclosures incoming; and millions of unemployed, the likelihood of at least a 10-20% correction seems to far outweigh the potential for this bull market to make new highs.
Accordingly, I’ve been taking profits and keeping cash on the sidelines to put to work when the next selloff happens. However, as I’ve been saying throughout this post, I’m also never fully out of the markets in case I’m wrong and the market continues higher and higher into the future.
What do you think? Is the market due for a correction? Are we going to see a once-in-90-years selloff as deep as 50-75%? How much cash do you keep in your portfolio? Feel free to leave your questions and perspectives in the comments.
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