Cash quota in year 2015

What is your investment strategy? What is your game plan?

It is common to read people writing about creating a basket for stocks for their projected passive income for year 2015. Nobody talks about how much cash they are holding (eg. total proportion of cash in their overall portfolio). Perhaps cash is just not as ‘sexy’ as stocks. After all we all know that the value of cash will depreciate over time just sitting in a bank account. That is why we invest our cash in the first place, to get higher returns.

Perhaps this post is slightly different from my other posts… it is not about any company analysis. It is not about possible opportunities. Let’s think defensive rather than offensive. It is about preparing for the worse (which few wants to talk about…). Nobody wants to hear about market crashes (here). Touch wood. But let’s imagine for a short moment, the worse that can possibly happen. eg. the stock market crash by 20% to 30% – which will probably translate to higher percentage losses for individual mid cap or small cap stocks. High interest rates which would cause troubles to companies with high debt to equity ratios. Deflation or stagflation. No growth to speak about, retrenchment all around. Property crashes and empty units. That’s when Cash is king.

So how are the markets now?

STI – see below (3300) – relatively high.

 

Dow (17,511) – very high.

 

VIX (the fear index) – not high.

What would stop one from doing the worse when all news are bad, that is to sell one’s stocks… to still believe.

One, of course, is not to trade using margins (not to be overly leveraged and forced to sell).

Next will be to have a relatively comfortable amount of cash (proportion of cash / cash quota).

I realized that at this point of time I have very little cash reserve (my ‘ammunition’ so to speak). My dad has always advocated having min. 50% of your net wealth in cash. There are different classifications of net wealth for this purpose, some may define net wealth as the money one have in his CPF, Insurance cash holdings, cash in bank accounts, unit trusts, bonds & shares excluding the property he is staying in (in this case I have approx 40% in cash). But if we are to define net wealth as the ‘liquid’ cash/wealth one have – we will probably only include cash in bank accounts, bonds, unit trusts & shares. For the latter classification of net wealth, I find that it is extremely hard to achieve min. 50% cash holding (in this case, currently I have only 8% in cash).

Even now, given the “abundance” of opportunities currently…. eg. low oil prices causing a lot of oil related counters to drop (even Russia ETF to drop), Swiss Franc devaluation (now the Swiss stocks after what happened to Russia stocks) , commodity counters still in low P/Es, and there are so many counters offering such high dividend yields…. In addition, I am still in red in some of my counters (eg. Golden Agri) and reluctant to realize my losses (esp. given the cyclical nature of these counters.. fundamentally these will rise eventually, maybe in 10, 20 yrs). However, let’s ask ourselves, are there really a lot of ‘fear’ around currently (remember to be greedy when others are fearful). Frankly, ‘fear’ is a bit subdued now if you ask me.

I do intend to raise my cash quota gradually (at a turtle pace) moving forward  and have ear-marked some stocks to be sold soon (like the coming months or years….). PS: My “soon” is not that soon.

I do not want to be caught in a hot state when the market turns ugly, eg. when I have too much at stake.

I have yet to receive my year end bonus and will include this eventually in my cash holdings (ammunition).

And also I intend to reduce shares buying unless really good bargains appear. But with most growth stocks near their all time high (eg. Vicom, Riverstone, Nera Tel etc)… it is a quiet period. But did buy a few lots of Supergroup recently.

I intend to sell some of my shares gradually (click here to see what stocks I hold). These include SIA, SMRT, CapitaLand & LYXOR JAPAN 10 (in sequence of “priority to sell”). Fundamentally SIA would be the weakest of the lot. So perhaps with the recent upswing in its stock price due to the low oil prices, this could be a good time to sell these stocks. Likewise for SMRT. I do not foresee oil prices to rise in the near future, so SIA and SMRT stocks should rise moderately in the coming months. CapitaLand stock prices is no where near its 2007 highs (fundamentally not much change), so it is of lower priority to sell at the moment.

Crude palm oil (CPO) prices will probably remain depress for a long time. So I probably have to stop my purchases of Golden Agri shares moving forward.