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Why You Need More of This Unpopular, No-Yield AssetBy
Wednesday, December 7, 2016
Keep it, and over time it will be worth less and less. It doesn't yield anything. And if you misplace it, it's gone forever.
For these reasons, it's easy to dismiss cash as an investor.
But in fact, cash is a good thing. And chances are, you'd be smart to have more of it in your portfolio.
Here's why...
Any kind of investment involves risk. Asset prices rise and fall in value from day to day. Bad earnings reports, Donald Trump's latest utterings, something funny going on at the European Central Bank... an infinite number of unknowns and could torpedo your portfolio. Not so with cash. Overlooking the long-term effects of inflation, in the short term, the value of your cash remains constant, no matter what is happening in the markets.
In today's markets, your cash doesn't yield much of anything. But most other supposedly "low risk" investments, like government bonds, aren't paying much either – some of them even have negative yields.
And sometimes, staying still – that is, not losing money – is enough.
There are different ways to hedge, or protect, your portfolio. Hedging is important because it helps reduce losses when your investment strategy doesn't work out as planned. An example of hedging is owning negatively correlated assets... One asset moves up when the other falls. But hedging can get complicated, and it can cost you a lot in broker fees.
And in the event of a financial crisis, even uncorrelated assets tend to move in the same direction – which is down.
On the other hand, holding cash is free and easy. It's the simplest way to hedge. While the state of investments is uncertain, cash keeps its value.
Let's say an investor has $50,000 in stocks and an equal sum in cash, for a total portfolio value of $100,000.
Then the stocks drop 5%, but the cash's value stays the same. This means that the investor has a paper loss of $2,500 on a $100,000 portfolio – or is down 2.5%.
But if the entire portfolio was in stocks, the loss would be $5,000, or 5%. Cash helped to hedge his portfolio, cutting his losses in half.
Few things are more frustrating than recognizing an excellent investment opportunity but not having the cash to buy it. Cash represents buying potential. It's there when you need to use it. Plus, when markets fall, the buying power of cash increases – you can buy more shares than you could the day or week before.
Legendary investor Jim Rogers once explained his approach to investing this way...
What he means is that when obvious investment opportunities come up, he takes advantage. Cash helps you avoid market risk, protects your portfolio, and is there when you need it. That's why keeping a portion of your portfolio in cash makes sense, no matter what's going on in the market.
Regards,
Kim Iskyan
Further Reading:
Catch up on some of Kim's timeless investment advice:
"Taking these steps will help you grow your portfolio over the long run..."
"For many people, there's no place like home..."
"I've learned a lot of expensive lessons in my life..."
Market NotesIT'S A BULL MARKET IN THIS RECESSION-PROOF BUSINESS Today, we're taking a look at the ultimate "recession proof" business...
Longtime DailyWealth readers know we're fans of companies that make products and offer services that will always be needed, regardless of the economic climate (like beer or cigarettes).
Another example of this idea at work is Carriage Services (CSV). The $465 million company operates 170 funeral homes and 32 cemeteries across the U.S. As morbid as it is, funeral homes are about as recession-proof as it gets. Whether the economy is expanding or contracting, people will need a place to put their loved ones to rest.
As you can see from the chart below, CSV shares are in a steady uptrend. People will continue to use funeral homes for years to come... And Carriage Services stands to benefit from that unpleasant but inevitable trend...
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