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Regular readers know that I would never tell people what to do. I am not qualified to and neither am I allowed to. Partly for the same reasons, I have declined invitations by a few readers to conduct talks for private groups or to have courses for the public.
Of course, we know that there are many investment courses out there and, recently, there has been discussion as to whether the authorities should step in to regulate these.
R Sivanithy says it well in a column in The Business Times recently that we "should always be leery of claims of fantastic performance that come with profit guarantees and no risk. After all, there are no free lunches in the cut throat world of finance - unless of course, one happens to be in the business of conducting "get rich quick" seminars."
So, when someone who is receiving about $15,000 in annual passive income from his investments in stocks and REITs asked me what he should buy next, I was ready to side step the question in my usual style but I decided to ask what percentage of his portfolio was in cash. He said about 3%.
Pause.
Pause.
Pause.
Pause.
The pause should be longer but I think you get the idea.
There is nothing wrong with keeping more cash even though cash is an asset that earns practically nothing in a savings account. Well, some banks offer 0.4% to 0.88% per annum now and although Garfield would say, "big, fat, hairy deal", having cash provides us with a peace of mind. The low returns for holding cash is the price we must pay for now. It is like having insurance and insurance cost money or don't we believe in insurance?
In an article I read some time ago, it was revealed that the UHNW rich in America (those with investable assets of $15m) would only feel rich if they had at least a million dollars or two in cash. That means a minimum cash position equivalent of 6.6% to 13.3% of their total wealth.
Remember, however, we could do quite a lot with a million dollars or two. If our 6.6% to 13.3% is ten or twenty thousand dollars, can it make a big difference?
In the pursuit of passive income, it makes sense to do a bit less pursuing and, instead, be pursued.
Related posts:
1. If we want peace, be prepared for war.
2. Be a real estate owner the easy way (4).
3. STE's story: The Millionaire Next Door.
... it is revealed that most high income earners are not wealthy. They make a lot of money but they don't keep much of it.
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12 comments:
I only invested 30% in share,unit trust. Still have 70% cash. Thinking to buy property. But I think not a good time now. Now waiting for chance.
Hi yeh,
You are being prudent, I believe. :)
Of course, property agents might disagree. ;p
Surprisingly, peterlynch believe in staying 100% vested in the market, and using some kind or rotation stragegy, he keep cash only of he feel there is nothing to buy, otherwise he would pile his money back in. Of course, not many can be like him. I am still reading his second book, beating the Wall Street. Hope to find out more soon.
Hi Mike,
Peter Lynch was also a fund manager with access to new funds as and when there were new subscribers. We don't.
Peter Lynch was also more "into it" and probably had a team of researchers helping him out. He had hundreds of companies on his radar. So, he was probably able to do rotation better than we ever could.
I am only a small retail investor. I must have a strategy that will work for me. :)
Warren Buffet, and all the well known faces in finance are in the top league.
They have large finances resources and best of all: they invest using other people's money ( OPM ).
Most people are not in such circumstance.
We need to determine our own goals, needs, wants. We might gain some insights from these "gurus" but insight can only be had if we are able to apply it in our circumstance.
These gurus function in a business environment with an army of researchers and backroom support.
We have to plan, research, execute and exit all by ourselves. This is time consuming. Try doing what ASSI did to discover just the entry price for UOB-Kayhian. Not so simple.
Depending on the timeline of our ages, investing strategies change. Portfolio change. With each decade and milestone in one's life, needs, wants, goals change. We need to adapt our portfolios to that.
Before buying any stock,property, car consider the:
Why?
What price?
How long?
When?
How many?
and importantly: are the answers to those questions aligned to the goals, needs,wants?
If not, go back and determine the goals, needs, wants.
We cannot invest just because other people are doing it!
Live a life with a plan.
If you fail to plan...
You actually planed to fail.
Most people will say that their goal is to make money. Well.. money can be made at the casinos and at one time flipping properties... which is actually trading. Property gets the limelight because the commissions, values are 5, 6 figures. But is it sustainable? will that meet your goal of making money?
A one trick pony? make $250,000 and thats it?.. try another property? I do not think my heart can take the stress of months and months on uncertainty.
Understanding wants, needs and goals is vital to be able to move to the next level. That level involves selecting the best instrument that is aligned to the needs, wants and goals.
Do not follow Warren.. he has his own needs, wants and goals.
Sorry for the long post!.. must be my sunday driving!
Hi Veronika,
Thanks for sharing your Sunday thoughts. Much appreciated. :)
Indeed, we are not Warren Buffett and we can never be like him. His holding company owns GEICO, an insurance company. That gives him access to a huge amount of liquidity that we cannot even dream of.
Without resources such as GEICO, he would not have been able to grow his wealth the way he did despite having the right mind and methods. Missing the last "M" (i.e. money) would not have worked.
I am glad you appreciate the blog post on UOB KayHian. We have Mike to thank for that one. :)
"In the pursuit of passive income, it makes sense to do a bit less pursuing and, instead, be pursued."
Sorry AK, what do you mean by this statement? Could you elaborate?
Hi Ben,
Ah, I was indulging in a bit of poetic moment. Like with all poetry, it is for the reader to interpret. ;)
Hmmm... Maybe I could try answering you question with a question:
Should we be chasing after passive income under all circumstances?
3% in cash is too risky as he lacks immediate liquidity for any unforeseen circumstance (eg. sudden illness).
My optimal choice is 25% in cash and this percentage must be enough to last at least 3 - 4 months, which is enough to look for a new job when one gets retrenched.
Hi INVS 2.0,
To be fair, I am not sure if this person has put aside a separate emergency fund enough for 12 months of expenses (yup, I think it should be at least for 12 months and ideally for 24 months). It could be that this 3% is simply what he has left for investments.
Personally, I do not count my emergency funds as part of my investable wealth.
AK,
If we are girls, we will reveal just a hint of cleavage and let boys come to us ;)
Chasing after boys with see-through blouse and micro-skirts... OK, boys may bring us home, but I don't think they will introduce us to their families!?
LOL!
How? My metaphor can complement your poetic moment?
Hi SMOL,
My ability to titillate pales in comparison to yours. ROFL. ;p
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