Liquid Courage: The Biggest Benefit of Cash – Financial Samurai
Just like a bit of alcohol can give you the confidence to chat up someone you’re interested in, having cash on hand, or “liquid courage,” can empower you to take on more financial risks or seize investment opportunities in uncertain times.
Since leaving my job in 2012, my approach to investing has been quite conservative, especially given the unpredictable cash flow from not having a regular paycheck, the financial responsibility towards my family, and the volatile nature of markets. I always ensure to keep about 5% of my investable capital in cash. This strategy not only provides a safety net but also allows me to capitalize on investment opportunities as they arise.
The Courage to Invest: A Balance of Risk and Security
Owning a mixture of equity-linked structured notes and municipal bonds, I’ve managed to hedge against downturns while maintaining a steady income from less volatile assets like real estate. Interestingly, while I shy away from borrowing to invest in the stock market, I’m open to using leverage in real estate investments, believing strongly in its tangible value and stability.
However, a recent conversation with a friend made me question whether I’m actually more of a risk-taker than I thought. This introspection came after making several significant investments recently:
– I invested in the S&P 500 during the lows of early 2020.
– I took on a seven-figure mortgage to buy a house in the summer of 2020.
– I diversified into cryptocurrencies and specific tech stocks over the next couple of years.
– I purchased what I hope to be my forever home in 2023, taking advantage of high mortgage rates to secure a good deal.
– Most recently, I invested in a venture capital product focusing on AI through Fundrise in 2024.
The Role of Cash in Courageous Investing
These decisions underscored the role of cash in bolstering my confidence to make bold moves. The liquidity ensured I could manage the investments without jeopardizing my financial stability. It’s essential to understand that while bull markets make most investments seem wise, the real test of investment acumen is during market downturns.
Determining the Ideal Cash Reserve
Deciding the right amount of cash to hold can be tricky. It largely depends on personal risk tolerance and financial goals. While too much cash can feel like a missed opportunity, especially in a rising market, not enough can cause panic in a downturn. Finding that balance where you’re neither too anxious about missing out nor too worried about potential losses is key.
Historical data suggests that stock markets can drop significantly, with bear markets occurring every few years. Real estate markets also go through cycles, typically every decade. Considering these patterns, keeping a strategic cash reserve makes sense to buffer against market corrections and to capitalize on lower asset prices.
Bear Markets as Part of Investment Strategy
Understanding that bear markets are part of the investing landscape is crucial. Over the past several decades, bear markets have been relatively short-lived compared to bull markets, which have seen substantial gains. Keeping a majority of your capital invested while holding a strategic cash reserve can optimize your long-term returns.
Cash as a Strategic Asset
In summary, cash is not just a safety net; it’s a strategic asset that gives you the flexibility to make bold moves. Whether it’s changing careers, starting a family, or taking a chance on a new investment, having cash gives you options and peace of mind.
In conclusion, aiming to maintain 5-10% of your investable assets in cash seems prudent. This not only prepares you for emergencies but also empowers you to take advantage of investment opportunities without undue stress about your financial security.
