Everyone loves cash. The problem is that it’s the one thing that seems to slip away as soon as you have it.
Whether it’s a set of dining room chairs, a new car, or the weekly groceries, cash is usually in short supply and heavy demand. And it doesn’t stop with the consumer goods. Stock market investors face the same situation.
Indeed, many investors are quick to jump into the market with both feet (some even use margin, the equivalent of jumping in headfirst). If a stock they’ve been following looks particularly enticing after a recent drop, some find it hard to resist the sweet strains of, “buy me, I’m cheap! buy me, I’m cheap!” However is it really a good idea to plunge right in? Perhaps not.
No matter how good an opportunity seems, there’s usually a better one around the corner. If your hot stock just dropped 10%, who’s to say it won’t drop another 10. If you bought less, and kept some cash on hand, you may pick it up at a cheaper price tomorrow. Or another quality offering may be down the next day. If all of your money is tied up in hot stock 1, you may have to miss out on hot stock 2 – or sell hot stock 1 at a loss. How many times has that happened to you?
The trick is to do things in moderation. Rather than betting everything at once (that’s greed talking to you), it’s usually better to spread your investments around. That’s called diversification and it’s a cornerstone of good investing. And what better way to diversify than to keep some cold hard cash on hand. Of course in the heat of the moment, that can be difficult to understand (and that’s why you need a good investment system).
In addition, cash in an interest bearing account is pretty darn safe. So you’re not only earning guaranteed interest, but you’re also reducing your portfolio’s market risk.
You’ll sleep better and be able to jump on opportunities that your fully invested neighbor can only dream about.
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