We’re so used to thinking that stashing our wealth in cash is not exactly the most financially savvy move we could make. After all, thanks to inflation (that’s stubbornly stuck at ten per cent) this cash pile will very quickly start to shrink.
And while we’re now (finally) being paid something more than a few measly basis points to hold cash, it wasn’t always the case. Ever since ’08, interest rates have been stuck to the ground like gum.Â
So why does the world’s top 1% love their cash so much? Is there something we’re missing?
The first time I learnt the importance of cash was during a good old game of Monopoly. My tactic was to buy every single card I landed on to increase my odds of landing a set which seemed to work out well. Until it came time to buying that third green card (aka the 2nd most expensive set) to complete mine.Â
Oops. I was all outa cash. I had spent it all on countless other (now stupidly irrelevant!) cards and had absolutely nothing left.
But since I was so desperate for that last card as it would complete my set, I had no choice but to mortgage a few of my other cards. Now I was in debt (thanks to my new mortgages) but I managed to snap up that last green card (a whopper asset). This meant my cash flow was dry as a bone and it was a while till I was able to build houses on that set and avoid landing on others’ cards! Had I had a pile of cash on the side, waiting patiently, and refrained from buying every single card, I wouldn’t have got myself into this pickle.
Cash is king
It’s no different when it comes to investing IRL. If you have low liquidity (i.e. all your cash is held up in stuff you can’t sell quickly without making big losses) or poor cash flow (i.e no cash coming in) then when you’re really desperate to invest in something (like that like green card!) you’ll be stuck. You’ll either have to sell assets (get rid of some cards) or take out a loan (mortgage your cards). Neither is optimal.
Very often, investment opportunities come your way when you least expect them. And if you’re short of cash, well, you either miss out on the opportunity or you gotta sell some stuff which is an absolute no-no. No one wants to be forced to sell because it usually ends up being at an awful time! Like now. You want to be the one who decides what you want to sell and when you want to sell. The when is probably the most important.
Last year, I invested in a handful of start-ups and the companies that I really wanted to invest in usually came up when I had the least amount of cash! I kept telling myself that had I had a pile of cash none of those opportunities would’ve come up! Call it Murphy’s Law or whatever but this is just the way it is and you must be prepared for everything or use you might just come to regret it. Read here the big mistake I made when I started investing – but do I regret it?
Tips from the super-rich
But there are some tips and tricks that the top 1% use to boost their returns and if there’s one thing the rich do to avoid all these sticky situations that come about from being short of cash it’s to stockpile it as though it were loo rolls! The super-rich don’t just settle for one pack, they go all in. I know, this example would not have made the slightest bit of sense pre-Covid.
See when you have cash on hand and markets take a tumble (like March 2020), you’re able to take full advantage. Because, as we know all too well, when there are too many sellers in the marketplace, price falls dramatically. Pretty much what we’re seeing now. And if what they’re selling is something you really want to get your hands on (like some superb companies at stupidly low valuations), then cash will be your best friend. Cash is what will allow you to swoop in on golden opportunities, at golden (once-in-a-decade) prices. Read here why our worst money moves make for the best learning experiences!
The thing is though, when it was March 2020, most of my money was locked up in highly illiquid assets (aka my start-ups) and I had hardly any cash around. This meant I had to wait until around November to snap up whatever assets were still on the cheap. But if I had some cash sloshing around at the time of the market crash, the likes of which we’ve never seen before, then my portfolio would be in a very different place to where it is now!
But there’s really no point mulling over what could’ve been! The best thing I could do is to learn from my mistake and make sure it never happens again. My New Year’s (financial) Resolution was to start having a cash pile for opportunities like these! Yes, I won’t be earning much (though that’s slowly changing!) and it could be invested and working for me but for that liquidity, boy it’ll have all been worth it.
Start now
You want to start (if you haven’t already) to build up a nice pile of cash so that you’re able to take full advantage of market downturns and any other investment opportunities that come you way! Don’t go overboard with the cash but make sure you have enough on hand that if something comes up, you’re able to act. And fast.
The exact % of your portfolio that will be in cash differ from person to person. Some like to have way more cash on hand (I currently have 20% of my portfolio in cash) while others will feel comfortable with far less sloshing around. Like everything in personal finance, it’s just that, it’s personal! There is no right or wrong way. So you do you.
When it comes to the world of investing, there are so many uncertainties. And the events of the past few weeks have shown us just how uncertain it all is. 2 banks went bust in 2 days! Read here how SVB went bust in a matter of hours and why you should care.
No one really knows what the future holds, let alone the next day. What’s certain is uncertainty. But being prepared with some cash on hand will help you (and your portfolio) more than you think.
So, start building that cash pile. Your portfolio will thank you later.
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.
Knead Your Dough 