Raising Cash...How Much?

I have had a number of investors send me messages about how much cash should they have on-hand for buying equities during a downturn? While I am not sure that I am the expert here, I certainly have a strategy that has been successful for me.

First of all, everyone needs to be reminded that I have a huge appetite for risk. If you are near retirement, then I would suggest investing most of what you own into high paying dividend stocks and only looking at what I post for the speculative portion of your portfolio. Most of what I do is speculative and my diversification policy is appalling.

That said, I usually have at least 20% of my funds in cash when the market is in an upturn. That's right, at least 20%. When I was younger, I had maybe 5% (maybe zero and also on margin) and I could never get ahead. I mean really ahead. I would be confident of the stocks I selected and not worried about the downturns.

While I was often right about the market turning back up, I was missing the best opportunities of the year to make serious money. Buying near the bottom of a correction is how beating the S&P average consistently every year is done. Waiting for the buy signal is also important. There is no point in being a hero, but I buy throughout the downturn buying with wide spacing and adding call options (or selling puts - going long the puts) the farther it falls. Always "pick" at things, never buying a lot at one time. It is also a time to "get simple". That means dropping the stocks that are not works to invest that freed up cash in stocks that are.

Using the 20% cash cushion (and margin after that) can lead to big profits. It is also big risk! Find a strategy that works for you and exercise the discipline necessary to make it work.