If you follow this blog, you know that I advocate creating your own investment policy statement (IPS). I’ve never been a person to keep a large percentage of cash on hand. I’ve always thought that putting the majority of my money to work in other higher appreciation potential asset classes was the best thing I could do.
What I didn’t consider until recently is that cash is a very important asset class itself and that even though cash may appear to sitting idle losing ground to inflation, it’s in fact working for me by allowing liquidity to take advantage of great opportunities as they arise. This is why I am accumulating cash as an investment strategy.
I haven’t sold any assets to raise cash. My cash is higher than normal as a result of not putting my entire annual performance bonus from my employer to work as I would typically do.
While it’s been sitting in a money market account this year, I’ve started to think back to the many “investing opportunities” that I said, “I wish I had more cash to take advantage of this.”
When reviewing my IPS last year, this was one of the things I noted for adjustment. I call it “opportunity cash” and it means increasing my total cash allocation.
Benefits Of Accumulating Cash As An Investment Strategy
The Value Of Being Ready With Cash
Are you ready to take advantage of a great opportunity? During the last several market corrections, did you have money to buy stocks while they were on sale?
Were you able to take advantage of the recent real estate crash and acquire some property?
Many people consider borrowing money to invest during these times. In fact, I’m embarrassed to admit that I once made the huge mistake of taking out a 401K loan to buy stocks during what I deemed to be a significant correction.
I rationalized that the ultimate return would be worth it even with the loan interest I would pay. The reality is that I probably broke even when factoring in the fees, interest and general inability to maximize the return because I sold those stocks prematurely on a bounce to pay off that loan.
Had I had cash waiting, I could have invested more during those fire sales and felt comfortable letting those decisions run long term.
Because I needed to retire the debt, I was forced to be a market timer. That’s not investing, that’s gambling!
How Much Cash Is Too Much?
I continue to fine tune my thinking on this. We know that roughly 90% of a portfolio’s investment return is tied to its asset allocation. It’s this allocation that makes a person a conservative, aggressive or a neutral style investor.