Monday, November 30, 2015
When you have a pile of cash in your brokerage account, what do you see?
If you're like a lot of people, you see it as money that you should be "doing something" with...
For many folks, having cash in a brokerage account feels like being in a casino with a wad of hundred-dollar bills. Why not "play" with that money?
After all, you're right there.
Talk to anyone who has had long-term success in the market, and they will tell you that having the right view on cash is one of the greatest differences between people who win in stocks versus people who lose in stocks.
Today, we share the right view. It could be a radically new way for you to view your investment account... and it could transform your investing for the better.
People who are serially successful with their investments are comfortable with the idea of holding a lot of their portfolio in cash. They know having cash allows them to buy bargains after markets crash.
Take legendary global investor Jim Rogers, for example. In the excellent book Market Wizards, Rogers said, "I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime."
This is one of the most important factors of trading and investment success: Don't spend your time and energy chasing mediocre trades and investment opportunities. Only move when the odds are overwhelmingly in your favor.
In all his books, interviews, and articles, Rogers makes it clear that he spends long stretches of time without having significant money at work in the market. He waits for extraordinary opportunities, where the odds are so far in his favor and the position is like picking up free money. When he doesn't see any sure things, he simply sits in cash and does nothing.
If you follow his lead, you'll probably end up a very successful trader. If you don't, you'll contribute to the bank accounts of those who do follow his lead.
You're not going to make much money sitting in cash today... And that's OK. That's not the point. Cash is an investment in reduced volatility... in peace of mind... in future opportunity.
Without cash, you won't have the opportunity to make a meaningful investment the next time there's "money lying in the corner."
Plus, even during "normal" market conditions, there are times when cash is one of the best assets you can own...
Just take a look at the chart below. It shows the returns for a variety of asset classes since the end of last year. As you can see, $1 at the beginning of the year – which is still worth $1 today – has outperformed $1 invested in long-term government bonds or gold... And it has only slightly underperformed $1 invested in the benchmark S&P 500 Index or municipal bonds. (We used tradeable funds rather than indexes so we could include dividends and interest.)
Once you see cash's potential to outperform other assets, it's a lot easier to hold on to. Even if it's boring, why "play" with all your money when doing nothing can deliver better results?
So, how much cash should you hold?
For lots of folks, holding 10%-20% of their investable assets in cash is a good amount most of the time. But that might not be the right amount for you.
You should hold however much cash makes you comfortable. If you're extremely nervous about stocks and other assets, hold more cash. If you're confident they're headed higher, hold less... But still hold some.
As we described in this educational interview, the market tends to go nuts from time to time... And this creates amazing bargains. Holding cash allows you to take advantage.
Brian Hunt and Ben Morris
Steve Sjuggerud says there's little downside in holding extra cash outside of the bank today. "The bottom line here is you ought to hold way more cash than you think," he says. "Think of the number you believe is right... and then consider ADDING A ZERO TO IT!" Get all the details here.
"No one talks about how to manage your cash," Dr. David Eifrig writes. "But you need to give some thought to where you put it." Find the ultimate cash-management guide right here.