The High Cost Of Idle Cash
There are many recent articles published on Seeking Alpha, from highly respected authors, expressing concern at the possibility of a change in the market's direction, increased volatility and even a share market crash (see here, here, here, here and here). Eric Parnell, in his article, "Why Stock Markets Crash - And What To Do When It Happens," suggests, "One might consider keeping 25% of assets in easily accessible cash in order to be poised for new opportunities. That percentage might be too low but I am virtually certain that it is not too high. Whatever opportunity cost that you pay in terms of diminished return can be quickly recouped during the next market collapse." The problem with this approach is it requires considerable share price volatility for profits from opportunistic buying of dips to outweigh the loss of income through reduced shareholdings. In various articles, I have demonstrated that setting aside cash to buy the dips worked very well in the 2000 to 2010 period due to the considerable share price volatility during that time. But in the six years 2010 to 2016, the Fed, by virtue of its policies, has greatly reduced share price volatility. Back in 2008 to 2009 there was a lot of residual fear in the market following the GFC events. No one really knew whether the share market would go up, down or sideways. In fact, the share market has risen since then at an increasing pace as fear has faded. Those who stayed in the market have done very well compared to those who stayed in cash. In 2016, I would say there is again considerable fear in the share market. But, it is offset by the fear of unnecessary loss of income if investments were converted to cash and there was no market downturn in the short to medium term. There is a way to have cash availability without selling down 20% to 25% of your share portfolio, as explained below.
