Image Source: Pexels
Many traders think a fully-invested portfolio is the way to go. But investing all of your capital means you are also taking a lot of risk. So let’s talk about how cash and risk management can work together to help you protect your portfolio AND grow your wealth.
Cash opens up opportunities
You don’t earn money by keeping cash on hand, so why is it important to hold some? Well, you want to have cash available for those opportune moments when stock prices fall. A nice store of cash means you can pick up bargains at an ideal entry point.A lot of traders and investors did this when stocks plunged 12% a single day when the COVID-19 pandemic was declared. They scooped up some marquis names and skipped all the way to the bank when the markets recovered. As we know, markets move higher over the long-term. Cash lets you take advantage of this.
Cash and risk management work together
But if you are fully invested in stocks or other asset classes, your portfolio is exposed to full market risk. A portfolio that has a higher beta than the market will move more dramatically than the the market.Let’s say you have a high-beta portfolio that is priced at 20% higher risk than the market. This means your portfolio will move an average of 20% more and 20% less than the market will. The advantage of being fully invested is clear: You benefit fully when markets rise. But if the markets are losing ground, your portfolio will lose much more.By holding 20% cash in reserve while the remainder is put to work, you are playing some defense. Trying to compete with the SPX 500, which is always fully invested, is challenging. If you’re savvy, you can beat the index and not be fully invested at all times.Having some cash available will lower the risk of your portfolio substantially and provide you with flexibility to add new or existing positions when the opportunity is in front of you. Keep this in mind so you never have to forgo an opportunity because you are out of cash.More By This Author:Visa Inc. Chart AnalysisForget Labels – Just Follow The Market Trend Roku Inc. Chart Analysis
