In the world of investment, some arguments are as old as the hills; and none more so than the amount of cash to hold in your portfolio. Some stick to a rigid percentage of their assets held in cash, others always aim to be fully invested. So who's right? Well, as ever, it all depends on where you're coming from.
We'll dispense with part of the problem right away. It stands to reason that everyone needs to hold some cash. After all, you'd find it hard to walk into Woolies tomorrow and exchange a few shares in Telstra for a bag of groceries. You need cash to cover your living expenses and an emergency reserve for, well, emergencies. How much depends on your personal circumstances. It's all basic budgeting and we'll say no more about it; but, when people say they always hold 20% of their assets in cash, it's often this that they're talking about. What's left of your stash, over and above these requirements, are your investment assets and this is where the plot thickens.
Margin of safety
One of the foundations of value investing is that you should make sure of a margin of safety in any investment—and the benchmark for safety is cash. If you can't find anything that looks like it offers this margin of safety, then you simply stick with the cash. Two recently-floated listed investment companies, MMC Contrarian (MMA—$0.97) and Wilson Investment Fund (WIL—$0.98), both mentioned on page 8, are currently following this approach with 58% and 78% of their respective assets held in bonds and cash. A more established example is Warren Buffett, whose Berkshire Hathaway vehicle held a whopping US$36bn in cash at the end of 2003. All of these companies complain of a lack of suitable opportunities and they're prepared to be patient in waiting for them.
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