Call to Action:
- For You: Do you agree with my view on cash not being worthy of a strategic allocation in your portfolio? Either way, you should write down and document your view on cash in your asset allocation strategy. This should be a line item in your investment strategy document. If you don’t have a written strategy for cash you’re more likely to make subpar decisions because you likely won’t have a strategy at all.
- Support the Podcast: If you’re subscribed to the podcast and have been enjoying my content, consider also subscribing to my YouTube Channel. One of my goals this year is to publish short investing videos to my YouTube channel in addition to my weekly podcast. Right now most of my YouTube videos are simply podcast episodes. But if I can grow my audience of subscribers on YouTUbe that would be greater encouragement for me to produce additional YouTube videos this year.
Mental Models discussed in this podcast:
- Opportunity Costs
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Show Outline
Listener Question from Twitter:
- “Most value investors aren’t what you would call market timers. But how do you think of cash strategically in your portfolio? Do you view it as an option on a better future opportunity set? Or as a potential drag on returns?” -Brian from Twitter
- Follow me on Twitter and send me your questions and they may be answered on the podcast in the future.
My views on Strategic Cash Allocation Strategy
- Both. I view cash as both an opportunity on a better future opportunity set AND a potential drag on returns.
- My preferred cash allocation is 0%.
- I want to be 100% invested in assets that can meet my hurdle rate of return of 10% or greater. Therefore, preferably I would be 100% invested in stocks that each individually offers me a high probability of achieving a 10% rate of return during my holding period.
- Am I always 100% invested in stocks: No.
- Cash should be held if you don’t have any good ideas and/or already have too much money invested in the good ideas that you do have. In order to prevent myself from holding cash, I concentrate my portfolio, so I need less good ideas.
Summary:
I don’t hold a strategic cash allocation in my portfolio. That is because I view cash as both an option for a better opportunity set in the future and as a drag on returns. This means that my ideal cash allocation is 0%. As soon as I identify assets that meet my target rate of return, I buy them to eliminate my cash allocation. I am not going to wait for 12% return opportunities when 10% opportunities are available today.
