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?