Cash is King
Table of Contents :
What does it mean.
Understanding it.
Examples.
Cost Cutting.
Where to Invest.
My Perspective.
Disclaimer.
If you feel insecure or anxious during today’s financially challenging times, having cash in hand alleviates some of this worry.
Cash has always been considered king, which gives you flexibility to take advantage of opportunities that might arise during such times
What does it mean
"Cash is king" term is used because it is considered more valuable than other forms of investment tools.
People use it during times when asset prices are high, because having cash just as a precaution when times are tough could be a smart idea.
Secondly, even good businesses keep extra cash on balance sheet, that gives them more flexibility when business cycle is down.
Thirdly, some people use cash as method of payment especially during recessionary times, when banks seems to be in trouble like 2008.
But from an investment point of view, keeping cash in liquid safe investment vehicles like govt securities is often considered as a safe bet.
Understanding it
Most of the time, investors maintain cash positions in liquid assets like bank CDs or short-term debt instruments, rather than stocks or real estate.
In most cases, return on such debt is lower than inflation so in a way you get negative rate of return.
But availability of capital at short notice during tough economic times, is the only reason why smart investors or even big companies prefer it.
Just keep in mind, unavailability of money during economic downturn is one of the main reasons, why businesses fail during recessionary times.
Also you may miss on some good deals, where you could buy excellent assets at pennies to a dollar, hence cash is king.
Examples
During recent global slowdown, big companies like Amazon Apple or even Microsoft are hoarding cash rather than spend it.
Often good deals are available during slowdown, so having enough cash gives you leverage to take quick and decisive action when opportunities arise.
Apple is prime example for having over $170 billion in cash, but use debt for expansion and buybacks which gives them tax write offs, hence makes a business sense.
Also Berkshire holds on to cash that Warren Buffett deploys liberally, when he buys good quality assets during every slow down in recent memory.
During 2008 financial crisis, he was lender of last resort to many household names like Goldman Sacs, Bank of America to just name a few.
Cost Cutting
There are many ways people and businesses save money, where they buy in bulk or cut back on spending to conserve cash.
Recently govt rebates to buy solar panel, or even EVs to get thousands of dollar in incentives are getting traction too.
The goal for people and businesses should be, to have a cash cushion just in case of any unforeseen event like a financial emergency.
Because the last thing you want to do is, run to the bank for a loan when that time comes, which comes at a cost to you alongside stress it will bring later on, while repaying it.
Hope you get the idea.
Where to Invest
If saving money is a big problem, then investing it wisely in todays’ economically uncertain times can be challenging.
I believe the best thing you can do is to make yourself financially aware, because you know your strengths limitations and risk tolerances that you have.
A smart way to invest your liquid funds is, to park in short term money market funds, which gives you access to funds quickly alongside some returns.
Whereas for a long term investment horizon, a combination of long term growth stocks, dividend stocks, real estate, a precious metals portfolio or even crypto could be worth considering.
My Perspective
With fixed return investments, you face a reinvestment risk in case Fed rates go down which result in inflation ultimately.
Similarly, when rates are increased to check inflation even safe US treasuries loose value.
This creates asset liability problems for all financial institutions, clearly evident from recent bank runs like SVB Bank or even Credit Suisse.
In some extreme cases, legislations are in place in most developed world where bank bail-ins with depositors money are in place.
That is exactly what happened with Greece some years ago, where depositors money over Euro100,000 were used to bail-in Greek Banks.
Disclaimer :
As a disclaimer, I’m not a financial advisor please consult one before investing based on your personal financial situation.