Too often ignored until it is too late.
The role of cash in one’s share portfolio is often underestimated. So much so, that many even consider cash a drag on a portfolio, particularly when markets go up. The return from cash on an inflation adjusted basis is effectively zero, and if you believe as I do that over the long-term markets go up, then I too agree that holding cash can act as a limiter to long-term performance.
But if respected and harnessed correctly within a disciplined investment strategy, your cash holding can be a powerful weapon that contributes positively to overall portfolio performance.
Tactically, managing cash is what differentiates someone who manages their portfolio versus a simple stock picker. And while we all understand that cash is required to buy stocks and seize opportunities, what are the ways we as managers of our portfolios can harness the power of cash within a share portfolio?
As an investor
Cash as an Insurance policy
When markets are volatile, like they are currently, investors can react in different ways. Some see volatility as an opportunity, others become worried that things will get worse. As the old saying goes, markets go up the stairs but come down the elevator.
There are several complex investment products and strategies open to investors that can provide downside protection. But at the end of the day there is no cheaper, easier or better insurance than to hold funds in cash.
I’m often reminded of BBUS, the BetaShares US Equities Strong Bear Hedge ETF, a suitably complicated instrument which has futures contracts to deliver an over 250% exposure to downside protection against the S&P500 falling. (So the price of the ETF would go up if the US market crashed).
Since inception on 24 August 2015, it has been a massive capital killer providing very little in the way of capital protection making the product a true oxymoron. Even the COVID correction was a mere blip of success over the long term woe. In fact in Mid 2021 when the ETF consolidated 10 units into 1 effectively raising the price by reducing the amount of units on issue, cynics would have seen this as a necessary move to give the price of the ETF more room to fall.
Whereas holding good ol’ cash in volatile…
