I recommend a disproportionately high amount of money to be held in cash and cash equivalent. For example, I would have more than a decade’s household expenses in cash and cash equivalent. Normally, this is the best way to prepare for a recession. If you are, say, 30 years of age, it is foolish to have so much cash in your portfolio, if you are 40 you can’t afford to, and if you are 50, you are postponing your retirement! Only a person approaching 60 can afford to trade “peace of mind” to “growth” because all the growth that one needs has already been achieved!
Now with the Corona Virus around big advisors like Goldman Sachs are also recommending a lot of cash in the client’s portfolio! Remember that like all choices in life, this too comes at a price. The price is – lower returns. Hence only a reasonably well to do investor can take this position to have more cash. However, this comes with its advantages too.
- It prepares you for a slow-down or recession or even stagflation. Immaterial of what the government of any country is telling you , you have to see what is happening in the economy. When you step out of your house, you see so many shops shut down, no hustle-bustle, you do not really expect the economy to be booming, right? Forget what bhakts and even the Ministers are saying in their Twitter Handle.
- One of the important things that cash does is it gives you the leverage to act! If you are sitting on cash and an opportunity presents itself, you can jump! Look at Buffett for international examples like how the toughest deals approach him..and how he makes a killing doing such deals. Closer home? Look at Mukesh Ambani – just the name that MA is looking to buy is enough to send prices soaring. EIH hotels, Asian Paints, Future Group, Cnbc-TV18, ..all these companies got bailed out by MDA, and some got consumed!
- Reduced portfolio variability – at a time when equity markets are at an all-time high, and interest rates are at zero, cash may not be a bad asset class at all. Only when the market falls (say dramatically) that people will talk about the virtues of holding cash. At this point in time I do have lots of cash and am sure that my 20-month cash call will be met with fresh vigour and good calls.
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