Investors commonly view holding cash as a mistake, particularly during bullish markets where cash is often considered unproductive. It typically fails to appreciate, falls behind inflation, and decreases overall returns. Consequently, both individual investors and fund managers tend to minimize their cash holdings during market peaks.
However, when a market crash occurs, the lack of available liquidity poses a challenge. Without cash reserves to capitalise on lower stock prices, the sell-off intensifies, exacerbating the downturn. Those who previously disregarded the value of cash suddenly find themselves wishing they had held onto it. Contrary to popular belief, cash is not solely about generating returns; it serves as a tool for preparedness. Cash equips investors to take advantage of opportunities as they arise and shields them from being forced to sell assets during unfavourable market conditions. Savvy investors recognize cash as an essential strategic asset for long-term success. Shall I explore liquid funds, as these funds offer flexibility while helping to mitigate inflation risks?
Advice by Anand K. Rathi, Co-Founder of MIRA Money
When market peaks and bottoms occur, it can be challenging to set aside money for buying stocks during market downturns. However, a better and simpler solution lies in the concept of asset allocation. Understanding and implementing asset allocation strategies can empower you to navigate market fluctuations with confidence and control.
To begin, determine your risk profile. For example, if you decide on an allocation of 80% in equities and 20% in debt, it’s essential to stick to that plan. Staying committed to your plan is a key part of responsible investing. Within your equity allocation, you should also decide how to distribute your investments across large-cap, mid-cap, and small-cap stocks. The same approach applies to your debt allocation, where you should define your long-term, medium-term, and short-term debt investments.
To mitigate losses when the market declines, adhere to a prudent asset allocation strategy. Regularly review and adjust your portfolio whenever the market presents opportunities. For instance, if your equity allocation exceeds 80% and reaches 85%, you should sell off 5% to bring it back to your target allocation.
Conversely, if the market declines and your equity allocation drops to 75%, you can use 5% from your debt holdings to restore the 80-20 balance.
By following this strategy, you not only manage your exposure across various asset classes but also take advantage of profit-taking opportunities. This disciplined approach helps reduce volatility and can lead to better long-term returns, provided it is carried out diligently and at appropriate intervals.
