Monday, October 5, 2015

Cash to Stock Ratio

Markets seem to be stabilising.

I have been in stocks for quite some time. I always wonder how much cash (or bond) I should hold relative to stocks.

A few books like "Random Walk the Wall Street" may recommend 40% bonds to 60% stocks ratio or 50-50, and rebalance every year.

I believe that the 60-40 or 50-50 ratio should be for older people. When you are young, you have cashflows from income and should take higher risk. Hence, when I start investing in stocks, my cash to stock ratio was like 10% cash (including emergency cash) to 90% stock.

Bloggers, who have been in the market for sometime, advocate having a warchest i.e. cash on standby. Some prefer a large warchest, so that you can take advantage of stock crash. A few think otherwise; they prefer a smaller warchest, as having a large warchest means losing out on the potential dividends.

I am thinking that when you are young, your warchest should be small given that you have income flows from work. When you are older or retired, your warchest should gradually be larger, so as to soften the impact of stock portfolio losses from market crash.

Currently, I am 1/3 cash (excluding CPF) to 2/3 stocks. This is an unintended outcome, as I did not really follow any fix cash-stock allocation.