Why cash will always be king for investors

Liquid assets can help you to navigate uncertainty, capitalise on market dislocations and secure financial well-being

In volatile markets, having liquid assets provides the freedom to take advantage of sudden market shifts. EPA

In the fast-paced world of finance, an investor’s fortune can change in the blink of an eye. Yet, the concept that “cash is king” remains unwaveringly true.

As a by-product of decades of market wisdom, this expression encapsulates the unparalleled value of liquidity in both times of prosperity and adversity.

The impact of holding cash reserves is remarkable, not just as a safeguard against market volatility, but as a strategic advantage that can lead to seizing lucrative opportunities.

As someone who advocates for investors to diversify their portfolios with strategic investments, the fact that having sufficient cash on hand is a necessary part of this equation can sometimes be a message that is often overlooked.

With that said, in this era of complex financial instruments and ever-evolving strategies, the wisdom of keeping a portion of one’s portfolio in cash remains as relevant as ever.

Historical proof

Throughout history, countless examples highlight the pivotal role of liquidity in shaping the outcomes of individuals, corporations and even entire economies.

The financial crisis of 2008 is one of the more notable testaments that depict the power of cash.

For example, a lack of sufficient cash saw Lehman Brothers crumble, with its stock plunging 93 per cent between the close of trading on September 12 and the company subsequently filing for bankruptcy with $639 billion in assets and $619 billion in debt.

On the other hand, those with substantial cash holdings, such as Warren Buffett’s Berkshire Hathaway, emerged as survivors in a sea of chaos.

His company, with its ample cash reserves, capitalised on this market turmoil by investing $5 billion in Goldman Sachs and reaping substantial rewards as markets eventually rebounded.

Many may see this as ironic, especially considering that Mr Buffet once said: “When people talk about cash being king, it’s not king if it just sits there and never does anything.”

However, when push came to shove, he and his company capitalised on down markets – thus, proving that liquidity allows investors to stay ready versus get ready.

Value beyond crises

The power of liquidity is not limited to crisis scenarios; it extends to seizing fleeting opportunities that arise in bullish markets.

Consider Apple, the tech company that is currently worth trillions of dollars after having revolutionised the smartphone industry with the iconic iPhone.

Having diligently built a war chest of cash reserves over the years, Apple has been uniquely positioned to invest heavily in research and development, fund aggressive marketing campaigns, and strategically acquire companies that complement its ecosystem.

This financial flexibility has facilitated Apple’s transformation from a computer manufacturer into a global technology juggernaut.

Beyond the corporate realm, individual investors can also leverage the power of cash.

In volatile markets, having liquid assets provides the freedom to take advantage of sudden market shifts, such as buying undervalued stocks during market panic or acquiring real estate when property values dip.

Investor George Soros famously capitalised on the 1992 Black Wednesday crisis by shorting the British pound. The pound plunged in value by about 15 per cent against the Deutsche mark and 25 per cent against the dollar.

His savvy move earned Mr Soros a $1 billion profit and cemented his status as one of the most successful investors of his time.

Extending beyond investments

Although having access to cash is useful for diversifying one’s portfolio, whether it be a corporation or investor, it is also equally important for an individual’s everyday life.

With the flexibility that cash provides, its use cases in everyday life are manifold: from creating emergency funds to shielding yourself against unforeseen financial hardships (such as job loss), to allowing one to cover essential expenses (like rent) without needing to use credit cards or loans until a new income source is secured.

The notion that cash is king is comprehensive and undeniably covers all facets of life.

Consider a regular professional who diligently saves and maintains an emergency fund. When an unforeseen medical crisis strikes due to a car accident, their preparedness showcases the real-life significance of “cash is king”.

Despite health insurance coverage, unexpected out-of-pocket expenses for medical treatment and car repairs will surface.

However, thanks to the individual’s cash reserves, they can swiftly cover these costs without resorting to credit card debt or borrowing, preserving financial autonomy and peace of mind.

The foundation of success

In a world where sophisticated financial instruments and strategies dominate headlines, the simple act of holding cash often goes overlooked.

Yet, as history has demonstrated repeatedly, liquidity offers a competitive edge that transcends the complexities of the financial landscape.

From market crashes to economic upturns, from corporate giants to individual investors, the wisdom of “cash is king” remains an invaluable guiding principle.

While the allure of high-risk, high-reward ventures may dazzle, the foundation of any successful portfolio lies in its ability to withstand turbulence and seize unforeseen opportunities.

This is why I implore investors to maintain a prudent allocation of cash, so that they can harness the power of liquidity to navigate uncertainty, capitalise on market dislocations and ultimately secure their financial well-being in an ever-changing world.

In the end, in the realm of finance, as in life, having a strong cash position remains a fundamental cornerstone of success.

Bas Kooijman is chief executive and asset manager of DHF Capital, a securitisation company for financial services