| Why You Need More of This Unpopular, No-Yield Asset | | By Kim Iskyan, founder, Truewealth Asian Investment Daily | | 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…
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| 1. Cash helps you avoid market risk. |
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.
| 2. Cash protects your portfolio. |
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%, or $5000. Cash helped to hedge his portfolio, cutting his losses in half.
| 3. Cash gives you "dry gunpowder." |
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…
| 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. |
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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
Editor's note: Kim is the founder of Truewealth Publishing, an independent investment-research company based in Singapore. Click here to sign up to receive his free Truewealth Asian Investment Daily e-letter in your inbox every day. |
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..." |
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| A systematic way to know when to hold cash... Holding cash reduces risk. No question about it. But how do you know when to hold cash... And how much should you hold? |
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| | My True Wealth subscribers just pocketed 19% in two months. It's a perfect teaching moment for how to set up a trade, when to get in, and when to get out... |
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| | It's Still Not Time to Buy Gold Yet | | By Dr. Steve Sjuggerud | | Thursday, December 1, 2016 |
| | "I personally sold all my gold and gold stocks yesterday," I told a crowd of 500 gold bugs at the Sprott Natural Resource Symposium in Vancouver at the end of July. |
| | When the Crash Comes, Will You Be Ready? | | By Porter Stansberry | | Wednesday, November 30, 2016 |
| | Today, we're going to show you how Watsa pulled off one of the most profitable bets we've ever seen... and how we can do the same thing... |
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