Wanna Know the Real Reason the World’s Top 1% Love Cash?
And why you should too!
We’re so used to thinking that stashing our wealth in cash is not exactly the most financially savvy move we could make.
After all, thanks to inflation (that’s stubbornly stuck at ten per cent) this cash pile will very quickly start to shrink.
And while we’re now (finally) being paid something more than a few measly basis points to hold cash, it wasn’t always the case.
Ever since ’08, interest rates have been stuck to the ground like gum.
So why does the world’s top 1% love their cash so much? Is there something we’re missing?
The first time I learnt the importance of cash was during a good old game of Monopoly.
My tactic was to buy every single card I landed on to increase my odds of landing a set which seemed to work out well.
Until it came time to buying that third green card (aka 2nd-most expensive set) to complete mine.
Oops.
I was all outa cash.
I had spent it all on countless other (now stupidly irrelevant!) cards and had absolutely nothing left.
But since I was so desperate for that last card as it would complete my set, I had no choice but to mortgage a few of my cards.
Now I was in debt (thanks to several new mortgages) but I managed to snap up that last green card (a whopper asset).
This meant my cash flow was dry as a bone and it was a while till I was able to build houses on that set and avoid landing on others’ cards!
If I had a great big pile of cash (or any in fact!) waiting patiently and if I refrained from buying every single card, I wouldn’t have got myself into this pickle.
Cash wears the crown
It’s no different when it comes to investing IRL.
If you have poor liquidity (i.e. all your cash is held up in stuff you can’t sell quickly without making big losses) or poor cash flow (i.e no cash coming in) then when you’re really desperate to invest in something (like that like green card!) you’ll be stuck.
You’ll either have to sell assets (get rid of some cards) or take out a loan (mortgage your cards). Neither is optimal.
Very often, investment opportunities come your way when you least expect them.
And if you’re short of cash you’ll either miss out on the opportunity or you’ll have to sell some stuff which is an absolute no-no.
No one wants to be a forced seller because it usually ends up being at an awful time! Like now.
You want to be the one who decides what you want to sell and when you want to sell.
The when is probably the most important!
3 years ago, I invested in a handful of start-ups and the companies that I really wanted to invest in usually came up when I had the least amount of cash!
I kept telling myself that if I had a pile of cash none of those opportunities would’ve come up!
Call it Murphy’s Law or whatever but this is just the way it is and you must be prepared for everything or use you might just come to regret it.
Tips we can steal from the rich
To avoid these sticky situations that come about from being short of cash it’s to stockpile it as though it were loo rolls!
The super-rich don’t just settle for one pack, they go all in. (I know, this ex would not have made the slightest bit of sense pre-Covid!).
See when you have cash on hand and markets take a tumble (like March 2020), you’re able to take full advantage.
Because as we know all too well when there are too many sellers in the marketplace, price falls dramatically.
Pretty much what we’re seeing now.
And if what they’re selling is something you really want to get your hands on (ahem, like superb companies sitting at low valuations) then cash will be your best friend.
Cash is what will allow you to swoop in on golden opportunities at golden prices.
The thing is though, in March 2020 most of my money was stupidly locked up in highly illiquid assets (start-ups) and I had hardly any cash around. Read here about that mistake and what it taught me.
This meant I had to wait until around November to snap up whatever assets were still on the cheap.
But if I had some cash sloshing around at the time of the market crash, the likes of which we’ve never seen before, then my portfolio would be in a very different place to where it is now!
But there’s really no point mulling over what could’ve been!
The best thing I could do is to learn from my mistake and make sure it never happens again.
Ever since then I’ve made sure to have a cash pile for opportunities.
Start now
Start building up a nice pile of cash so that you’re able to take full advantage of market downturns and any other investment opportunities that come your way!
Don’t go overboard with the cash but make sure you have enough on hand that if something comes up, you’re able to act. And fast.
The exact % of your portfolio that will be in cash differ from person to person.
Some like to have way more cash on hand (I currently have 20% of portfolio in cash) while others will feel comfortable with far less sloshing around.
Like everything in personal finance, it’s just that — it’s personal! There is no right or wrong way. So you do you.
Investing is all about how well you cope with uncertainty
And cash can help with that.
Uncertainty is built into its DNA
And the past few weeks have shown us just how uncertain it all is. 2 banks went bust in 2 days! Read here why SVB went bust in a matter of hours and why you should care.
No one really knows what the future holds, let alone the next day.
What’s certain is uncertainty. But being prepared (with some cash on hand) will help you (and your portfolio) more than you think.
So, start building that cash pile.
Your portfolio will thank you later.
Disclaimer: This is not investment or financial advice. It is my opinion only. This is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.
This article has been published on my personal website: https://kneadyourdough.uk/
Read more stories like this by subscribing to The WikiMonday Bulletin.
