Does your Investment have Cash Reserves ?????
To understand this very important aspect about investing please read on …..
1) Every successful business never invests all its profits back into the business
2) A part of the profit is extracted and kept aside as cash reserves
3) This helps to iron out the volatility in the business
4) Business Orders are never steady
5) Sometimes Orders can flow at a fast rate
6) And at other times the flow can ebb as business slows down
7) The highs and lows all are part of a business cycle
8) The cash reserves work like shock absorbers that allow the business to wade through tough times
9) It is like the Emergency Fund one needs to have to wade through uncertain times like the Pandemic
10) An Investment Portfolio too needs a cash component to handle Market Volatility
11) When we enter Bear Markets and Portfolio Value falls one has two options
A) To wait out patiently – This is a tried and tested method and perhaps the best thing one should do who is invested purely in Equities
B) Even while you wait out through the bear Markets, you can use your additional cash reserves to buy out Equities at bargain prices and thus make the volatility work for you
12) Clearly while ‘A’ is a standard option ‘B’ becomes the preferred option
13) There are two methods to use the ‘B’ Option
C) Do Asset Allocation & Rebalancing yourself
D) Allow the Fund to do Asset Allocation and Rebalancing
14) The ‘C’ Solution has Capital Gains Tax implications
15) The ‘D’ Solutions has no Capital Gains Implications
16) ‘D’ Solutions are provided by Dynamic Asset Allocation Category of Funds which have a debt ( Cash Element ) and during every bout of volatility they use the spare cash to buy equity at low prices
17) Many a times ‘C’ Solutions are not implementable because when the opportunity shows up the client is not available to sanction more investment
18) Or the Client is influenced by the ‘Market Fall’ Chatter and takes time to understand the opportunity by which time the opportunity may disappear
19) Also ‘D’ option is based more on Algorithm based processes which keeps human emotions out of financial decisions
20) Human Emotions are the biggest enemy of Investing Decisions
I rest my case
