Cash Is King
Keeping a portion of your portfolio in cash provides a cushion during downturns and enables opportunistic buying when asset prices are depressed.
Maintaining a portion of your investment portfolio in cash serves as a strategic buffer during market downturns and provides the flexibility to capitalize on investment opportunities when asset prices decline.
Let’s explore this concept through a practical example.
Example: Navigating a Market Downturn
Imagine you have an investment portfolio valued at 100,000 Rs with 10% (10,000 Rs) allocated to cash equivalents and the remaining 90% (90,000 Rs) invested in a diversified mix of stocks etc.
Suppose the market experiences a downturn, leading to a 20% decline in the value of your stocks and bonds. Your non-cash investments would decrease by 18,000 Rs (20% of 90,000 Rs), reducing their value to 72,000 Rs. However, your 10,000 Rs in cash remains unaffected, leaving your total portfolio value at 82,000 Rs.
In this scenario, your cash allocation has cushioned the overall impact of the downturn, reducing your portfolio’s loss from 20% to 18%.
Seizing Opportunities Post-Downturn
With 10,000 Rs in cash readily available, you’re in a position to purchase quality assets at reduced prices during the downturn. For instance, if a particular stock you had been monitoring drops from 100 Rs to 80 Rs per share, you can now acquire 125 shares with your cash reserve, compared to only 100 shares before the decline. This strategy allows you to enhance your portfolio’s potential for recovery and growth when the market rebounds.
Financial advisors often recommend maintaining a cash allocation ranging from 2% to 10% of your portfolio, depending on individual risk tolerance and financial goals.
Conclusion
Incorporating cash into your investment strategy not only mitigates losses during market downturns but also positions you to take advantage of investment opportunities when asset prices are depressed. This approach enhances your portfolio’s resilience and potential for long-term growth.
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