Last year (2011) was my first full year of being in the market. As many of you know it was an interesting year with political unrest (Arab Spring), natural disasters (Japan) and U.S and European debt trouble causing the market to enter a volatile phase in the latter part of the year. It would test the resolve of investors of all ages and levels of experience including this neophyte himself. I learned a great deal about my investing style and risk tolerance as well as discovering an unexpected challenge; the difficulty of holding a cash position.
It appears my tolerance for “investing” in cash is quite low. Judging from my track record in the first year I prefer to put my capital to use as soon as it’s available instead of letting it accumulate. With the benefit of hindsight I believe that this characteristic may be a liability going forward and is no less of a handicap than the investor who desires to keep cash instead of utilizing it for the purchase of attractive investments. How common are these opposing beliefs and are they really all that different?
I can’t speak with any personal experience as to the motivation of holding cash (I hope readers facing this challenge will chime in) so I will have to speculate. I assume it has at least something to do with the perception of risk. Having cash in hand is very tangible and the decaying effect of inflation is not felt as acutely as is investing in a common stock with the potential of seeing the value dissolve within days of its purchase.
My challenge is the opposite of our risk averse investor mentioned above, I have an emotional “need” to have my capital invested. I’m not sure exactly why this is and will be doing some more reflection to see if I can come to a better understanding of what emotional drives are behind this behavior. As I explore this issue I’ve decided to invest in cash for at least the first quarter of the year and possibly longer.
Although I can’t articulate precisely my motivation for holding little cash, I can explain my reason for building up higher cash reserves. Like many of you I keep several watch lists of stocks that may be good investments and then I try to narrow this list down to the ones that meet my criteria for an initial purchase. Several opportunities presented themselves last year, but I didn’t have the cash available to take advantage of any of them. I know there will be other opportunities in the future for new position as well as for adding to current holdings and I want to be ready to take advantage of it and not look back wishing I had the funds available.
At the moment it’s not hard sitting on cash as the market run up over the last few weeks have made many of my watch list items overpriced, but bad news concerning Iran, a default by Greece or any other number of unforseen events could cause the market to go back into a depressive state. Maybe I will be successful in taking my own stoic advice and follow reason instead of being led blindly by emotion.
So which of the above investors describes you, eager to invest or reluctant to act? Why?
The Stoic Investor 
I too am eager to invest. I have about 5K sitting in my account ready to jump into something. I try to buy in the dips, so I can usually make myself wait a few days until I find an attractive investment, I can’t wait weeks or months, that just isn’t me. Patience is almost never one of my strong virtues. Thankfully I do like to save more than I like to spend, so I keep in the black. Also when I purchase dividend stocks I feel like I am getting a special treat with every dividend. I just bought my first stock with monthly dividends STB, I’m so excited!
Thanks for stopping by! All of last year I was usually making investment purchases on a monthly basis. This year I’m going to try to hold off. With the market being within 10% of its’s all time high I think most of the quality dividend stocks are a bit over priced. Just my two cents…
Congrats on buying your first monthly paying divi stock. It really becomes motivating when you see those divi’s adding up.
I also prefer to be fully invested, but right now I am resisting temptation. Most of my favorite stocks are expensive at this point in time, I can’t bring myself to pull the trigger. Also, I want to make at least one purchase every month, but I do not save enough to do so. I save on average $600-1000, but make purchases in increments of $1250 to keep transaction costs low. My stockpile of cash allows me to make monthly purchases and be able to strike when I see a good value.
I too missed out on some great opportunities last year because I didn’t have cash on hand. MCD around 75 and WMT under 50 come to mind.
I’m hoping to see a downturn in the market soon.
CI– I think there is a lot to be said for dollar cost averaging. I do it myself with my 401k contributions and all of last year I was making stock purchases on a monthly basis. My thinking now is that I would prefer to make those purchases during the down cycle and not the up cycle. In the end it may not matter if I purchased the stocks for a few dollars more or less, but for now I’m a little hung up on my entry prices. Thanks for reading!
You could try to set yourself a goal. Say, to have 5% of your assets in cash, with a minimum of $4k. As soon as you have used cash to buy interesting stocks, you first need to build up your cash again. Or maybe you could say that you should always have $4k in cash, and that you are only allowed to invest any cash more than $4k…
I am a bit risk aversive, so about 50% of my assets is cash (with, by the way, only $20k assets total so far), but I can imagine there are people out there who feel I am taking a risk too (inflation).
Maybe defining your perfect asset allocation (matching your goals and how much risk you are willing / capable to take), and then sticking to that, is the thing to do.
Hi Petra, thanks for stopping by. I agree with what you say and I’m attempting to do something very similar. The last two months I’ve set aside the money I would normally be investing and just letting it build up. I have a small portion that is allotted for investing and the rest is just going to accumulate going forward. Once I have an amount set aside for opportunity purposes I will take monthly savings and divide it in half between what will go towards immediate investment and what will go to the opportunity fund. This way I get the best of both worlds, investing now and having a growing fund that will allow me to take advantage of future opportunity. Thanks for the suggestions.