Monday, 18 September 2017

Manage Cash Holdings in Portfolio

I read yesterday’s Straits Times article ‘The best investors sit on plenty of cash’ with interest.

What are the roles of cash in your investment holdings?

Intuitively, cash gives you options during extreme market conditions. It means one can buy at depressed market price to average down, to build a position in a promising counter. In essence cash presents opportunity to reduce your losses, or increase your earnings when market recovers. 

Cash also serves as an anchor to your portfolio as its value is constant. It is a valuable tool from a trade execution stand point as described above. It also helps cushion the fall in portfolio value from a psychological stand point, reducing anxiety in investors and prevent hasty and erroneous decision making. 

However, to make full use of  cash during market downturn, one needs to have the capability of identifying the approximate low price point of your stock. More importantly, investor needs to buy fundamentally strong counters to make his bottom-fishing attempt worthwhile. 

This means changing one's mental attitude towards cash and not view it as a drag on your portfolio returns, but a valuable tool to earn you big returns. 

And fundamental analysis is a regular homework for investors. A good sense of general market conditions and broad understanding of industry dynamics help too. 

How much cash should one hold in your portfolio is then a personal choice. In general it falls within the range of 10% to 40%. I pick 15% at current market conditions which is slightly optimistic buy not euphoric yet, and may increase as market rises. Max could be 30% when STI hits 3,500. 

Some people go to the extreme level by holding 50% or even 100% cash. I would advise against that. While this might entail that that he has plenty of options on hand to cherry pick during market trough and make a killing subsequently, he may miss the preceding market rise.

Having a huge cash pile also messes with one's psychology. It takes an even greater mental discipline to sit still. And slight market movement may be amplified in his brain and trigger buy action due to eagerness to earn. This is a dangerous situation as the person is put in a position where he is always tested and tempted. 

And such extreme investment tactics require an even greater level of technical expertise and psychology maturity to deal with the uncertainty. Unfortunately many investors tend to over-estimate themselves in this area. 

Market is rational most of the time, and it is difficult to outsmart him. Hence we should not try too hard to beat him by adopting extreme cash management practices. Often, we should maintain one foot in the market, stay close and feel his pulse, and calibrate our decisions accordingly. There are times to buy, to sell, to trade, or to do nothing. 

Only during extreme market conditions then radical behaviours such as an all-in show hand is appropriate. 

1 comment:

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