It’s always necessary to carry some cash in the wallet, right? Besides paying the hawker for our food during lunch time, we also need cash to buy bread at the bakery or get the newspapers at the mama shop downstairs. Therefore, it’s literally impossible for one to be fully invested in the stock market right down to his last cent, even if he makes use of financial leverage (but that’s another story for another day).
But even if I can, I wouldn’t want to. As I have mentioned many times already, I am pretty risk-averse (I know I am starting to sound like a broken tape recorder). So yes, those stuff in the My Passive Income page isn’t our entire net worth. In fact, it’s only about 60-70% of our household’s investible assets, which also means that there is actually more than $50,000 of cash or cash-equivalents sitting around collecting dust.
“What?!! You’re having too much cash idling around, earning pitiful interest from those miserly banks. You should really have more invested in the wonderful world of equities. Be a slave-driver to those little dollar workers and make all of them work hard in the stock market for you to be able to semi-retire earlier.
I admit that it’s really tempting to put more of our money into the market. I mean, just adding another $50,000 into some Reits that provide a 5% dividend would generate an additional income of $2,500 a year, putting me 12.5% closer to my $20,000 passive income goal. Furthermore, the banks are unable to fend off the Inflation Monster which is slowly nibbling away the purchasing power of my monies every year. Aargh!!!
However, I am pretty determined to keep this $50,000 in the bank to protect my beauty sleep. You see, I need to feel good in order to sleep well. Besides “chatting with my wife” before bed time, getting a peach of a deal with my purchases would also boost the probability of sweet dreams that night.
Unfortunately, life’s a bed of roses and you can’t escape those annoying thorns sometimes. I have found out on a few occasions that the price of that particular product I bought became lower the next month/week/or even DAY!
The “I’ve bought a lemon instead!” sucky feeling could haunt me for the entire day unless I have the excess moolah to buy more of it to lower my average cost. (That is, if the product is something I need/want more of and it’s also of a certain quality.) I could then justify to myself that I got a good deal compared to the average Tan and be able to smile at my good fortune, instead of feeling stupid and cheated.
Interestingly, this a lower price on the next day scenario is one that constantly plays out in the stock market. Unlike iPad or sanitary pad prices, prices of shares aren’t that sticky. They could fluctuate by up to 5% in a single day for no reason at all. You might just wave it off if Whisper becomes $0.50 cheaper, or forego the chance to grab those wonderful toothpicks at Ding Tai Fung if the iPad you bought yesterday is selling at a $50 discount. But for a $20,000 stock purchase, the $1,000 price difference could easily pay for my monthly mortgage!
Ok, I am whining like a baby again. That’s because a 5% paper loss is really nothing, especially compared to those financial crises like the one we had 5 years ago, when the value of the entire stock market and your portfolio can be almost halved within a month.
I could imagine myself feeling like a loser on those nights if I were
1. 4 or 5 years older and
2. started investing in 06/07 and
3. was fully invested just before the GFC
And the truth is, an event like the GFC might happen tomorrow. But instead of dreading it, I am actually half looking forward to it, because I would almost never subscribe to 3. I am not fully invested.
Vicom/Boustead/Starhub/SPH shares might plunge by half if both Spain and Portugal suddenly declared themselves bankrupt, even though these businesses are unlikely to be adversely impacted. And if those shares can be described as beauties, I would really start behaving like the sex-starved man in one of Buffett’s famous quotes and grab all of those beauties.
Therefore, I would always keep some ammo in case those beauties get closer and closer and the time is ripe for an easy “kill”. You wouldn’t want to be without bullets when 10% blue chip yielders are suddenly commonly available and within striking distance. That $50,000 I had stashed away could then easily generate $5,000 of yearly income!
But still, even at that point, I wouldn’t go all out. I would leave a bullet or two behind, in case a more beautiful woman comes along. The stock market is probably one of the few places that rewards the patient Casanova. There’s always a chance the market that is halved could get halved again and a 15% or even a 20% yield target could be staring at me right in front of my face. Therefore, it always pays to have some cash lying around for that potentially better deal that would make our sweetest dreams come true. Otherwise, be prepared for sleepless nights.
Hi Hww
Be careful of finding another woman as your wife might beat you!!! Hhehehe just kidding.
What you hv said is darn right. Keeping an emergency situation will be crucial though it is always tempting to plunge all your cash into an income generating assets like reits and other dividend income stocks. I guess it also helps if you are earning monthly active income from your job so more money can be raised from it in a crisis.
Hi B,
Haha, knowing the person I am, she knows the settlement figures will really make me think twice.
Yah, it’s sort of like an emergency fund, although quite a big one. Think the point I wanted to drive through (not so clear in the post) is that if you’re relatively new to markets, fully invested, and then the market crashes, you could become disillusioned with investing almost straight away. One would likely feel better if he can grab some good deals during that crisis and potentially reduce the % or paper losses. If you’re an aggressive saver and have an iron-like rice bowl, you can probably be less risk-averse.