CASH Management for the Common Stock Investor and Trader
Think of it as risk management. When we are at relative lows, my CASH position is high and gets put to work in the stocks I’ve been waiting to buy. As the Indexes swing up, my CASH position starts to rise as we trim positions and take profits. There are big swings and little swings, I still raise and lower my cash with the momentum of the market. So, when we are at relative tops, with a larger CASH position, I am in better shape to withstand a downdraft and not lose my money. That is my first trading rule, Don’t Take Losses. My second rule is I must always maintain a cash position at the close. A negative way of saying it is no margin at the close.
Not only do I raise and lower CASH to manage risk, its also a position. It may not go up in a rally, but it also doesn’t go down. Sometimes we chop up and down for several days or even weeks. Again, it softens the churn for those who do not want to actively trade daily and allows us to keep a little looser stops on open positions because we have decreased position size. That helps avoid getting jiggled out in volatile markets of stock you want to hold more than for a short term trade.
I never go to bed in debt. That means I always have some cash. Sounds trite … au contraire. Notice the sometimes huge gaps, both down and up at the open? Those are exasperated in effect on your account by use of leverage, i.e. margin. It is the antithesis of CASH. Leverage is what killed the financial system, subprime lenders and borrowers and the job market. People paid up with OPM … other people’s money. Then they couldn’t pay in the great unwind … of leverage. The same can happen in your trading or investing account. The risk of the downside is so much greater when the exogenous event comes and you are caught off guard, say 25% leverage. Suddenly you are 45% levered when the gap down comes and you both have no CASH with which to buy and also may have to sell longs when the margin % comes near the level at which you receive margin calls.
Bull markets can breed complacency. It is easy to get in the habit of carrying margin in order to try and get back earlier losses, making it up fast! That is when the mistakes come. We just can’t hit a grand slam when one guy is on base. Same with your stocks, deliberate and disciplined investing is what gets your money back.
CASH means control. Big money (70% of all common stock is held by institutional money mangers, whether pension, hedge, quant or mutual funds) constantly rotates based on economic data analysis and computer algorithms. If you don’t start the day with some CASH on hand, you are immediately in margin to catch up with any move you may wish to emulate. I ALWAYS have some cash on hand at the close, and more on Friday closes. My minimum is generally 10% each night and 25% over the weekend. I may use margin intraday, and its FREE. No margin fee or interest charge from MB Trading for use of margin unless you end the day with a margin balance. I am also leery of holding ultra ETFs overnight. I have but not often.
This recent downdraft, although only 4 or 5%, saw me run to 90% cash in a hurry. We had rallied for 3 months, seemed to be topping and I snugged my stops. That turned into lots of CASH very quickly. I then try to tippy toe back in after the big money sounds the all clear like today. I may miss 1 or 2% on the upside, but am happy to trade that for the peacefulness of sleeping on a bed of CASH and avoiding the extra 4 or 5% on the down side. CASH is insurance. Cash is control. Cash gets you back in sync with the market. Cash is flexibility. Cash is de rigueur. CASH rules.
I also haves levels or layers of CASH. I always have some CASH in my IRA, in my checking account, in my drawer, in my car, in my high yield income account… you get the idea. I have never felt like I was missing out on being “all in”. Instead, I have felt in control, safe, flexible and a lot less emotional with greenbacks on hand. Emotional stability is key to making sound deliberate trading decisions. Try it. And Don’t Take Losses. Cash is better than a losing position, it doesn’t go down.
Disclosure: Long CASH