Wendy Myers | How can cash help you take advantage of equity opportunities?

Ever heard of the expression ‘cash is king’? Well, cash isn’t always king when considering investing in securities, but it certainly has a place. Cash can be an effective tool when investing in securities, and investors should be aware of the different types of cash solutions and how their securities portfolios can benefit from having access to them.

A savvy investor understands the important role of cash when investing, and a cash solution that offers timely access to cash is essential. While you are invested in cash, you also want comfort that your funds are earning returns to contribute to your portfolio’s investment performance.

Cash liquidity is crucial to take advantage of equity opportunities when they arise

Benjamin Graham, the father of value investing, said, “The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioural discipline that are likely to get you where you want to go.”

Once you have defined your financial plan and are contributing cash towards your portfolio on a regular (ideally monthly) basis, you will need a ‘parking space’ or short-term vehicle for this cash to reside whilst you consider your next investment. A cash solution that allows you to deposit and withdraw seamlessly and which provides you with immediate access to your cash when stocks reach attractive entry or exit levels is therefore a critical requirement of any share trading platform.

How does this strategy help investors grow their long-term wealth?

An overnight cash product is the most effective solution for short-term cash requirements. This kind of product works well in situations where you want to take advantage of market volatility and still have easy access to cash if the security you intend to invest in is trading at a good entry level. All equity investment platforms will be able to offer you an overnight cash product that meets these requirements. These cash solutions provide an overnight interest rate, but differ from provider to provider, so make sure you choose your platform wisely.

For investors wanting to hold a cash position a bit longer, and who are prepared to give up the benefit of immediate access to their funds, investing in a money market fund is another option. If you choose this option, access to your funds can take two to three days from the day you send the instruction until you are disinvested from the fund, and once the funds are in your bank account you also need to factor in the time for your bank to deposit the funds into your investment account.

The goal of most money market funds is to maintain the value of your investment while still generating a respectable level of income. These funds provide a higher interest return than the overnight rate to compensate you for the lack of immediate access.

Factors to consider when selecting an appropriate vehicle

When deciding on the most appropriate vehicle for cash holdings in your portfolio, it is important to understand the different interest rates earned on your funds after platform fees, as well as the accessibility of the funds. What you give up in accessibility, you earn in increased interest rates.

In addition, if a material percentage of your portfolio is invested in cash, you need to understand the impact this may have on your portfolio returns. Returns from overnight cash and money market unit trusts may not keep up with inflation, which means that the value of your investment may decline in real terms over time. For this reason, it is important to understand how much money you are comfortable keeping in cash and how much to invest in equities. Equities are the single asset class historically shown to outperform inflation, so it is important to understand the need to balance exposure to different asset classes to ensure you grow your long-term wealth and achieve your ultimate investment goals.