"Cash is King" is it a Thing of the Past?
These days, it seems no one wants to hold cash. People don’t want to have cash in their accounts – they want it invested no matter the rate. With interest rates hovering near all time lows and the central bank considering another rate cut in Canada (YAY!!!) – people are scrambling to get cash in the market soaking up yields in the form of dividends and bond payments. However, if people are always funneling money into investments – what cash is there for opportunities?
My philosophy is, there is nothing wrong with holding some cash and waiting around for the right opportunity. Obviously – there isn’t always going to be a great opportunity waiting for you every time you have cash – so why waste it on something mediocre when you can get something great. It’s like getting nosebleed tickets when for a few dollars more you can enjoy the game courtside.
In these types of scenarios when markets are very high and valuations are at an all time high– it is important to establish your opportunity cost which refers to the benefit that one could have received but did not because they chose another path of action. Instead of waiting for a 10% return for example, you choose an investment that yields 8% because you did not wait for the correct opportunity. In this case your opportunity cost is -2%.
How do you know that a better opportunity lies elsewhere?
I do not, but if history has shown us – nothing keeps going higher for ever. With all the uncertainty surrounding the markets right now with oil prices, interest rates, and the US ELECTIONS – any one of these events can have a significant impact on the market. Just a few weeks ago rumors about an interest rate hike caused the Dow to lose about 500 points.
If you are unsure of the market, isn’t better to invest now and just wait it out? Doesn’t timing the market end badly in the long run?
My philosophy is simple; I am holding cash to wait around for better deals. They are deals in the market right now. For example, large multi-national companies right now such as Manulife, Laurentian Bank and Magna International are trading at discounts but finding a great opportunity at this point is like looking for a gem in a public mine. You might find one but it won’t be what you’re looking for.
One of the reasons people do not like holding cash is because it grows very slowly. People would rather take 1-2% in the market then zero in the account and they rather take 1-2% now as opposed to 5-8% later. Something, I have learnt over the years is patience – do not invest just for the sake of investing. Invest for the sake of growing a solid portfolio, making purchases at key points in order to maximize upside potential.
In relation to timing the market – timing the market is when people speculate on selling and buying prices. They are constantly getting in and out of a stock for modest gains hoping to buy it back lower and sell it higher and in the process racking up endless transaction fees.
When is the best time to make such an investment?
Right now - consider all the factors that could push the market lower like the ones mentioned above. For example, markets are shaky when the CB meets for a discussion or following a large media event. All of these are circumstances in which individuals get scared and dispose of shares. Look for key swings in the market and selling patterns.
One of the reasons, I like holding cash – is because it is a direct transition into value investing.
Value Investing is purchasing stocks that trade below their values. Value investors are constantly looking for that next opportunity and looking at areas that are often under looked. Stay tuned for next week’s post where I will explore value investing further.
Disclaimer: All of the above information is my own personal opinion. I do not have a business relationship with any of the companies listed above. Please consult with a financial advisor when making any financial decision.
Disclosure: Long Manulife.
Cover Image from WSJ - http://www.wsj.com/articles/SB10001424052702303482504579177651252217192