Cash is still the king of the investment castle
Simple money can help investors prepare for the unexpected, writes Martin Hawes.
Cash is king, so the saying goes. The strange thing is that although in a market downturn people are quick to say that cash is king, during good investment times cash does not seem regal at all.
In good times, cash pretty much gets ignored– a right royal snub.
At the moment, with good investment returns coming from shares and property, holding cash seems a waste.
But in the right circumstances, cash can be the best thing there is – the source of some of our very best returns. When the economy and politics turn horrible, cash really earns its keep.
At these times, cash comes into its own and we are reminded of the royalty of a stash of cash. In tough times, cash is not just king but is undisputed Emperor of all it surveys.
Of course, we never really know when things will turn bad and so uncertainty makes cash a critical part of all investment portfolios - I would never be without it.
Ten years ago, before the GFC and when markets were booming, a friend of mine was all cashed up. He had sold all his shares and gone completely into cash. When I queried why, his reply was telling: ‘‘Well, Martin, I’m worried that we have bad times coming. I am 50, and in my lifetime I probably only have one more opportunity to enjoy a bloody good crash’’.
Well, he got his ‘‘opportunity’’ with the GFC and went far beyond ‘‘enjoy’’. He had a ball as he bought up investment bargains, and no doubt made a fortune. Cash was king and he had plenty of it.
The dilemma is that we never really know when the next ‘‘bloody good crash’’ will come along. Hindsight comes with 20/20 vision, but any picture of the future is always blurry. We never know what event might occur overnight and act as the trigger for a big fall.
With such doubt, I always run my portfolio with at least some cash. If there is some sudden political or economic event, however unexpected it may be, I always want to be able to buy.
And that means some cash in the portfolio. Even at my most confident and certain, I would not have less than 5 per cent cash in my portfolio and I ask myself repeatedly that if there was a sudden big market fall, whether I am in a position to buy.
Even if we do not expect a calamity, as investors we should at the least expect the unexpected.
For me, the lower returns from cash are simply the price of uncertainty and they will be made up in the next slump. Never forget that even though no-one can be sure of what will happen, when markets fall and opportunity for bargains are presented, that boring cash becomes lord of all.
Martin Hawes is the Chair of the Summer KiwiSaver Investment Committee and an authorised financial adviser. The Summer KiwiSaver Scheme is managed by Forsyth Barr Investment Management Ltd. Disclosure statements for the scheme are available at www.summer.co.nz.