Cash To Investment Ratio: How Much Cash To Hold and Why?
To be a good investor, one needs to have a keen eye for stock picking.
To be a great investor, one needs to continue picking great companies and holding on to them.
But, there is one essential allocation that most people tend to overlook.
And that is the cash to investment ratio.
What is The Cash To Investment Ratio?
The cash to investment ratio is simply the ratio of cash one opts to hold on for a period of time.
To visualize, if you have a portfolio of stocks worth $50,000 and a war chest of ready cash worth $50,000 ready to be deployed, hence the cash to investment ratio is 50%.
Usually, 50% of a cash position is a little on the high side. And this starts to get more overwhelming as your portfolio net asset continues to grow.
Let me explain why.
An investor just starting out their investment journey might start off with a portfolio worth $10,000. This can consist of $5,000 worth of stocks and $5,000 cash. And that is perfectly normal since it takes most of us just a few months to save up that amount.
But if a seasoned investor has a portfolio with a Net Asset Value of $1,000,000, a 50% cash to investment ratio would mean that he is holding onto $ 500,000. Not only it takes a long time to save up to that amount, but the investor might be having too much anticipation of a market crash.
Meaning to say, he or she is so convinced that the market will crash that they chose to deliberately hold on to a high level of cash.
Why A High Cash To Investment Ratio Is Not Feasible As You Grow Your Portfolio?
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