The topic of this article is what to do when you have a large allocation of cash in your portfolios. Investors in America are currently heavy in bonds and straight cash from fears of the fiscal cliff and global slowdowns. I do not believe in people having the title investor if more than 10% of their portfolio is in cash as it's an asset that year after year can lose money.
Cash is a currency, which is a store of value. You want something that grows in value, simple as that, cash loses money every year almost guaranteed, even after factoring for its grand use of liquidity. Some investors give a very liberal view to cash and say have 15% or more in cash to capture opportunities. There are always opportunities in the markets! You can always find an investment instrument to exercise your ideas. Opportunities do not fall in your lap, I think the Efficient market hypotheses is right in this respect and makes opportunities very hard to find in the short term. These are three ways to handle that extra money that is doing nothing but gathering cobwebs in your local banks hard drives.
1. 1. Hedge out your risks.
In my simulator portfolio I have a large long position in Toyota. I like Toyota from a marketing, finance and even engineering point of view, but I am not 100% sure it's in a good sector. I am not worried about aluminum, or rubber prices, nor labor wages at Japanese factories individually. But collectively they make up the risks of Toyota. I do not have the time to research each risk extensively; it's much easier to simply short companies with the same correlations and variables. With this view you have to consider the hedging stock as a commodity and not as a company. In this particular case I took a 10% short position in both Nissan Motors (OTCPK:NSANY) and Honda (NYSE:HMC). These three guys all share very similar market risks. Supply chain problems from an earthquake would usually kill Toyota (NYSE:TM), but not if you were prepared with a hedge similar to this one.
The best thing about #1 is that you can keep cash. You need the cash to cover your shorts, but with that it's serving a purpose other than just sitting there. If you cannot tell already I cannot stand underinvested portfolios! And if you want to capture short term trades you can more easily take advantage of them with a lot of shorts balancing out your longs.
2. 2. Add 1-3% in each position.
This is kind of blind; you simply plow your gains back, equally or not, into your same holdings. This is really good by making you re-consider your positions. When you're about to put more money up for an old holding it's like a balloon, the surface is the same color and texture, it's just bigger and can release more air in the future
3. 3. Hold gold, the real currency.
I think of gold as the world's international currency. The shiny substance is a store of value, but one the government can't just print more of. I think the best way to look at gold is your new cash. You could convert all of your savings to a gold ETF (NYSEARCA:GLD) and think of it as cash instead of whining about the dollar losing value. For those that rely on salary though it's not as important as you will bite the bullet of inflation further and further down the road as you earn your money. It's better to take all your money now and convert it into gold and liquidate it for dollars accordingly (Or any other currency that has a good exchange rate to gold).
Those three things should give you a springboard to start new ideas and get that cash to work. Remember, we are investors, not currency holders. You want to own assets that gain in value and that have great futures. Currencies have shown throughout history that they always fall. In our lifetime we will see a major currency fall and I guarantee you gold would get a higher premium than the same value in another major currency, absent of algorithmic corrections and arbitragers. The reason we still deal with it is because we have been brainwashed into thinking paper money is worth anything and we become absolutely frantic when the fiat tale appears to be coming to an end. It's like we finally realize that we need a currency not controlled a central bank. So go out there and make your money work for you, don't let it take a cooler break when there is much to be done!
Michael G. Morrison
Morrison International Accounting
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.