“Cash is king” – we almost always read or hear about this catch phrase especially during times of extreme uncertainties. But then we ask ourselves, can cash really be the king perpetually? Certainly, we all know that the answer is no for a simple reason. If the cash is continually kept as cash, then we are earning a paltry sum of at most 1% per annum going by the current bank interest rate. Think about this, a $1000 principal compounded at 1% can only give $4,800 after a long 40 years. In this calculation, we have not taken into account the inflation going at 2-3% per year in the 40 years, let alone some years when the inflation rate bleeps up when commodity prices shoot up suddenly. So , cash is king is only one part of the story. It has to be duly invested from time to time to make our money work hard for us.
But here is the irony. During times of extreme volatilities, people generally are fearful and they cash out of investments and keep a high proportion of cash. And when the pessimism runs deep, they continue to hold the cash and even cashing out even more for fear of further losses. Well this can happen to cash-strapped individuals because they have to do a lot of work to patch up the debt-holes. However, for those who are cash rich or still earning a decent an income, this is the best time to increase our investments. Unfortunately, there is so much fear that very few dare to take the plunge to invest. Well, I am not coming from the point of a stock remeiser or housing agent or a financial planner for I am not in any of those professions. I am looking at it from an investor like anyone of you out there. Of course, I do not mean everyone is on selling side because there are definitely a small proportion of wise buyers out there waiting to scoop up these investments at wonderful prices. However, I can safely say that more people are at the selling side than those on the buying side, and that leads to the weak investment environment. But do note that everything has a floor. Very often, by the time we started to realize that was the lowest price, it was almost certain that it had already gone behind us.
So, cash may be a king during uncertainties, but it has to be duly invested somewhere and some time along our time line in order to take advantage of it. Therefore, we should extend it to “Cash is king, but it has to be duly invested when opportunities arrive.
Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.