The below quote was taken from Boustead’s chairman message in their annual report 2016. It got me into deep thoughts whether I am using my cash in the right way to invest.
“Investing for long periods in cash is not desirable. But in the short run cash is like an option over every asset class, with no expiration date and no strike price. Cash provides the option to sweep up a bargain when it becomes available and this must have some value above the fact it earns almost nothing. If the purpose of an investment portfolio is to grow as well as protect the wealth you’ve accumulated over the years, doesn’t it make sense, if you can afford it, to also hold an option?”
– Roger Montgomery
When analyzing companies, we sometimes look at the free cash flow. Hogging plenty of cash means the company is cash rich but may also means the management has no direction or strategy where to invest to grow the company.
Personally, I felt the free cash flow model can apply to individuals as well. If you have followed my blog since last year, you will have realize I have been making purchases every month. This has left me little cash on hand when opportunity arises.
After reading the quote from Boustead’s chairman message, I calculated my invested amount versus my cash on hand. I am 61% invested and have 39% cash on hand. Personally, I feel having 39% cash is too little when opportunity arises. Since the market is also expensive now, I hope to accumulate more cash for the next opportunity.
What do you think is the ideal ratio for investment versus cash on hand?
I think that’s a very decent allocation given that your 61% consisted of mostly dividend and reits stocks which will give you further cashflow every quarter.
I look at 70:30 instead, as most of the invested at in REITs and div stocks, so the cash portion will rise within a year or so.