On November 1, 2019, CNBC posted an article reporting Warren Buffet’s Berkshire Hathaway as holding a record $128.2 billion in cash. The article stated that rising stock prices are impeding Buffett’s efforts to find places to invest.
Well, how about that? Currently, with the S&P 500 reaching a 24% gain thus far in 2019, our TradeMyTrades Calculator is suggesting a 27% cash reserve. As stock and fund prices have risen, the TradeMyTrades community of investors has been increasing their cash pool.
Buffet is often referred to as one of the greatest investors of our time. So if Warren Buffet values holding cash as opposed to going “all in” as stock prices rise, shouldn’t we? The answer is a resounding yes!
If you read much about Buffet and other successful investors, you might note commonalities among them. One common theme is that money management is a key aspect to their success. As evidenced by the TradeMyTrades website and the services offered, I don’t believe there is enough attention given to the importance of money management provided to retail investors.
Money management first begins with valuing available investment dollars and using them wisely. From our perspective as investors using a continuous investment plan such as a 401K, our primary goal is to accumulate and stockpile as many fund shares as possible throughout our investing years. Second, we want to end our years of investing with our accumulated shares valued above (hopefully, well above) the average share price paid.
Why don’t I like dollar cost averaging? My answer–something is better than nothing! Dollar cost averaging is a hands-off and zero management investment method. But like most things left unmanaged, dollar cost averaging is not optimal.
In 2007 and 2008, we experienced the great recession. Many of us saw our retirement accounts cut in half within a few short months. Luckily, those of us who stayed in the market recovered from our losses. However, many of our coworkers decided to exit the market and have been reluctant to return. A down-trending market is NOT the time to exit. A market downturn is the time to buy using a money management system.
The experience of having all of our investment dollars in the market when it tops and rolls over can be a terrifying experience. I don’t want to risk experiencing that scenario again, and I don’t want you to, either. Money management is an important key to our investing success, and I might argue it’s the most important. A reserve of cash provides opportunity when Mr. Market decides to give us those bargain prices we’ve prepared for. Buying more shares at lower prices is how we lower our average cost of shares. This is our buy low and one day sell high strategy!
Please be cognizant of the 2019 market gains and your investment dollar exposure. The market typically averages an 8-10 percent annual return and it’s currently posting 24%. If the big institutional players decide to take profits, stock prices could begin to fall quickly and your portfolio could suffer. Having a designated cash pool for future investing at lower prices will mitigate your risk. If you’re not using the TradeMyTrades Money Management System, I encourage you to do so.
Contact us to learn more about the TradeMyTrades Risk-Cash Indicator and how TradeMyTrades can support your investments in the Thrift Savings Plan, 401k, 403b, IRA, or other.
Join Premium to have immediate access to the Risk-Cash Indicator applied to the TSP C, S, and I funds.
Visit us at TradeMyTrades.com
Best regards, Lynn