If you follow my 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 My New 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. I am now about 11% in cash. This is the most I’ve ever had “on the sidelines” so to speak. I always want to have 5-7% cash as a buffer in my portfolio, so I’ve got roughly 5% extra to wait for the right moment. How will I know? Well, that’s the tough part and candidly what I will be trying to figure out. The approach I’m taking is that I don’t have to do anything with this cash. If no great opportunities appear, it will remain in cash. I’m truly looking for a “break glass in case of emergency” type opportunity. Some ideas floating around right now are:
- Real Estate – As I’ve said before, I invest in REITs to avoid the hassle factor of physical real estate. Probably, the only way I would by a property is if there was a business entity attached.
- Business Franchise – I‘ve looked into this before, but did not go far due to the complicated nature of being a franchise owner. In a perfect world, I could buy a successful turn-key business that had a strong management team and did not require my active effort.
- Rare Collectibles – I tend to invest in traditional assets like stocks, bonds and real estate thru REITs. I do recognize that there are some forms of collectible investments that have large appreciation potential. This is a risky area and I would need to increase my expertise in this one much greater than I currently possess.
Where To Keep Your “Opportunity Cash”
Finally, I also want to be as smart as possible about where I keep this cash. I need to be able to access it quickly which means having check-writing ability, “brick and mortar” office or ATM access. This eliminates CD’s or many online high interest accounts that do not give you instant access to your cash.
I’m also a big fan of having multiple liquid accounts instead of one large account. This way I avoid co-mingling of money that have different purposes. Currently I have the following:
- 2 checking accounts
- 1 business checking account
- 1 savings account
- 3 money market accounts
This may seem like a lot, but given the FDIC insurance limit of $250,000 per account, I want to ensure that I have the appropriate flexibility long-term without have to put any future cash in an uninsured location. I’ve decided I will dedicate one of the money market accounts to this “opportunity cash” purpose. This account is tied to a taxable brokerage account and it has check-writing privileges meaning I can immediately access these funds for any opportunity that arises.
What new ideas do you have for your cash? Do you have a strategy to quickly take advantage of investment opportunities?