Asked on 03 Dec 2019
Do you think it is better to always be fully invested or to keep cash in a warchest?
There is opportunity cost to keeping cash but allow to capture special events.
Often times we heard recession is coming. Though it would definitely comes one day later but who knows when. The rule is if you invested only in a good quality company, fully invested can be the way. I always keep certain cash amount depending on the SPY PE ratio. But staying out of the market is definitely a no.
Since we can never predict when the market will go into a depression, we should instead strive to prepare for it. So I will always have a war chest. Always have some money set aside in case opportunity comes knocking.
Don't be in a hurry to deploy all your money. If there is nothing worth investing in, it's perfectly ok to just sit on cash. I'm sitting on cash now and collecting dividends from my investments, and I don't have any issue with that.
I'd only go fully invested when deep in a crisis, but even then I will probably have an element of fear, since you never know when the market has bottomed.
It depends on your skill level.
Starting out, I was always cautious and I never knew whether I was investing the right way. I kept a fairly diversified portfolio with huge cash holdings. Somewhere 30 - 40% cash?
Over the years, I picked up what are price multiples, price discipline, etc. As long as I find attractive stocks trading at very reasonable valuations, I would still invest.
We're not investing in the overall market, so I tend to ignore where S&P 500 goes. I am focused in the individual valuations of each businesses. When they are so undervalued, you have to pounce on it. Right now, I hold about 10% cash.
Again, it boils down to one comfort level. Have higher cash buffers too. Over the years, know your style.
Never fully invested. I always like to keep dry powder to capture special events, like you say.
That said, I think I am currently sitting on too much of that. Probably should look at deploying more!
I always like to have a cash cushion to take advantage of any market corrections. You are right that there's opportunity cost involved so it's a balancing act. If one can't sleep well at night by being fully invested, then he/she could consider lightening up and have some spare cash.
For Me Personally,
I keep vested, but not fully vested.
I would keep cash aside, so when opportunity arise, I would have extra cash.
Currently, I keep roughly 50% cash.
And would add position when my cash level increase.
Fully invested as much as possible for me. Funds are locked up in option positions that can expire in a week's period. These are then redeployed / recycled into new positions. Flexibility to hold back when necessary.
I prefer having a war chest so that I can take advantage of anomalies in the markets. However, keeping a large war chest can be inefficient as you may not find too many opportunities. So, I keep approximately 2-5% of my portfolio value as a war chest and keep the rest invested in diverse asset classes.
I work at Kristal.AI, and it's my passion to evaluate various upcoming investment opportunities.
There is no right answer here, I guess for me is a balance of both per say. For me, I make sure I have emergency funds (6 months) + sufficient funds for future events (wedding, renovation etc). From there, as of now I am kinda holding minimum cash. However I do keep an additional layer of buffer (about 10-20%?) cash in the case where I can still afford to deploy when I identify a great & undervalued business. Also, don't deploy just for the sake of deploying. I made that mistake - I bought stocks just because I want to invest that spare cash. It doesn't work that way! Opportunities don't (coincidentally) come all the time just when you want to invest...!
Hope it helps!
Always keep a warchest even in peacetimes. You have already answered the question in your second part of the statement: "There is opportunity cost to keeping cash but allow to capture special events.". Enough said
Stay vested, sell into the rally (for some overvalued stocks and/or stocks that had alr meet/exceeded your initial target goals)
Allocate a small amount of money (from salary,dividend received) as warchest.
As always, before we start investing, it will be best to understand our objective. These are some questions that I will always refer to:
What is your capital?
How will you want to invest your capital? E.g. lump sum or an amount on a regular basis
How long will you want to stay invested? E.g. 10 years
What is your risk appetite? E.g. How do you feel about short-term volatility?
What is your objective for investing?
Opportunity cost exists regardless of whether we choose to invest or not. The only way to prevent regrets is to understand our investment objective and to be confident on what we invest in.
So long as we are comfortable and confident on what we are invested into, and what we have avoided, then opportunity cost don't really matter - move forward! =D
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