👑Cash Is King And Here’s Why I Think It’ll Forever Wear The Crown

We’re somehow wired to think that cash is trash. That it’s the worst possible asset to own when inflation is higher than interest rates which is definitely the case now since inflation is ~8.3% while rates are still 10x less than that! And that’s with the Fed (and other central banks) raising rates. 

So all thanks to this phenomenon, your cash pile will start to get smaller. And smaller. Until you’re left with nothing! And right now, with inflation as high as it is, it’ll only take a few years before your pile of cash will have halved in value.

There are, of course, instances in which you seriously need to own some cash and no alternative will do. And this is for your emergency fund. This kind of money needs to be highly liquid since it’s for emergencies you’ll need access it to it ASAP and for that, you cannot afford to have it anywhere other than in cash. (Read here how to build an emergency fund).

But beyond that, we don’t really think of cash as having any other actual use. But boy can cash be cool!

Cash is liquid. This is it’s crowning glory. You can use your cash at any point, at any time and at any place. And for that, it’ll always be valuable but recent events have proved just how valuable having a stash of cash really is. 

Right now, markets all over the world seem to be falling apart. From bond markets (talk about an actual bubble bursting) to stock markets to alternative markets, they’re all losing steam. The Nasdaq (an index of US tech stocks) is down ~25% since the start of the year while the S&P 500 (an index of the 500 biggest companies in America) is down ~17%. The Nasdaq is well in bear market territory (a decline of 20% or more) while the S&P 500 is edging closer to that scary/dreaded/hated number. 

Markets are clearly losing their cool. And I don’t blame them! They’re faced with an avalanche of trouble: notably inflation. But not just any old inflation. Price rises that are the result of both supply and demand happenings. Then there’s rising rates (though they’re still low!) bungled with falling growth, a war and stupidly high debt levels. Trouble is clearly here but worrying won’t get you very far and being a pessimist certainly won’t! Read here why being an optimist will get you farther than being a pessimist ever will.

But having some cash on hand can help you bag a bargain, or several!

Cash is opportunity. Cash is flexibility. And cash means you have the choice to act quickly. Whether you choose to use it or not, that’s up to you, but you’ve got the option! And that is priceless. Otherwise, you’ll have missed out on many chances. Chances that could’ve increased your returns, lowered your risk and seized quality stuff on the cheap. 

Stocks are slipping. Bonds are falling. No matter how diversified you are, you’ll most likely be losing money on all fronts right now. Or at least most fronts. This means that our risk is rising while returns are falling. Diversification is meant to take care of that. But not now! Now everything’s gone outa the window.

Though I might add, if you haven’t lost money in recent weeks, it probably means you aren’t taking on enough risk. People way older than me have said that their portfolios have lost a lot less than I. In other words, they’ve barely dropped! This makes sense. I’m young and have only just begun investing so I’ll want to invest in areas that can grow my money not just things like infrastructure and defence. Capital preservation (unlike my older friends) isn’t a priority for me right now. Capital growth, on the other hand, is my #1 focus!

The thing is, just when everything looks as bleak as can be, that’s when we’ve most likely hit the bottom. Obviously, no timing here! But that’s just how I like to think about it. When markets see tomorrow as slightly-less-bleak than today that’s when they’ll start to go up. 

Sure, we could swing sideways for quite a bit (not going up or down, some stupid static thing in between) but since markets are forward-looking creatures, they’ve got future stuff priced into today’s price. So, all else being equal, if the future looks better than today, well, you could expect prices to follow suit. 

Look out ’cause they move quicker!

And this is why markets move faster than the actual economy. And this is precisely where that pile of cash will come in handy: to pounce on the things that have been oversold. The assets that have shed more value than their fundamentals have lost. When markets overact, that’s when bargains are around. When investors overestimate the damage, pricing in doom till infinity, that’s where the opportunities are at.

Pessimism is like a leech. It’ll suck the life out of you, stripping you of anything good. And that’s precisely when investors sell. When things are too pessimistic to handle.

When stocks are cheap relative to their fundamentals (otherwise it’s just a plain old value trap!) that’s when people should be buying. But if you’ve got your entire portfolio sitting in stuff that you can’t/won’t sell then what will you do when bargains come across? When there’s blood on the street and everyone’s too scared to invest? 

And this is why ~25% of my portfolio is in cash. Not because I’m a scaredy cat or because I can’t really think of anywhere good enough to put my money but because I want to pounce on assets when they’re trading well below what they should be. 

I had a look at some funds whose share price has dropped as much as it did in the dotcom bust. Of course past performance and past prices should not be your sole reason for deploying your capital but it’s certainly something to pay attention to. 

Being greedy when others are fearful is easier said than done.

But the hard choices are often the best ones. 

‘Buying the dip’ looks easy in hindsight. We all say we’d have grabbed all we could in March 2020. The biggest sale yet since we saw its recovery. 

It ain’t easy jumping in when everyone is scrambling for the exit door. 

So make your move when you’re ready. And remember what your cash is for! 

To quote Morgan Housel: “All past declines look like an opportunity; all future declines look like a risk”. 

Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.