Cash Is King…For Now

The past few days had seen the markets taking a deep dive far more spectacular than those in the Olympics. Whatever the reasons presented; the United States jobs report, the unwinding of the Yen carry trade, the potential of a further blowout in the Middle East crisis, etc., panic is seen among investors and traders. The VIX index, colloquially known as the market fear index, spiked more than 200% over the past few days.

As mentioned before, short of a nuclear winter, an alien invasion or a Chicxulub-level asteroid hitting Earth, life still goes on, and the markets will eventually recover and back on track for their upward trajectory. The main concerns right now should be thinking of what discounted asset classes/counters to buy, and finding the cash to get them, instead of lamenting on the unrealized capital losses one is holding onto.

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Having an ample amount of cash is important in such market sell-off conditions, for it is the best financial instrument to acquire other asset classes without compromising its present value. While in times of boom, having too much cash would result in what is called a cash drag, i.e., the opportunity cost of keeping cash rather than being deployed in assets yielding higher returns. In times of bust, however, it is illogical to sell off a depressed counter to buy another depressed counter, so cash comes in useful here.

For The Bedokian Portfolio, the 5% to 10% cash component is there for this moment, for it acts like a war chest of sorts to take advantage of in down markets. This cash portion is not to be mixed with your daily uses, emergency fund and savings for your discretionary needs, and once inside, it should stay in the portfolio until it is planned for drawdown. It is fed by dividends from equities, distributions from real estate investment trusts, coupon payments from bonds and interest payments from bank accounts or treasury bills, and lastly your own cash injections.

Whatever the markets throw at you, find that sliver of opportunity and capitalize on it. Keep calm and stay invested.