'All cash' versus '80% cash and 20%' stock portfolio

When the market turned downwards recently, some bloggers declared that they had cashed out and were 100% in cash.  Yes, the market did turn down further, but then it rebounded quickly and to a higher level.

"When the market goes down, people think it will continue to go down."

"After the stock market has gone up, people think that the probability of the market continuing to go up is high."

If we slashed our stock-market exposure every time we felt uneasy, we would buy high, sell low and garner disastrous investment results.

Also these short-term events that we react to need to take into consideration two desirable yet conflicting goals - one goal is to avoid being poor and the other goals is having a shot at being rich. Each goal is desirable. The question is, how do you allocate your portfolio between these two goals.

Is being 100% in cash at any time a sensible action? Experts are unlikely to suggest an all-cash (or all-bond) portfolio. After all, a mix of 80% cash (or bonds/ and 20% stocks will have comparable portfolio gyrations, but with a significantly higher expected return. At the other extreme, advisers probably won't recommend an all-stock portfolio. They will plunk at least some money in conservative investments (cash or bonds), to temper the stock portfolio's price swings and provide money in an emergency.

Why not 100% stocks?

Benjamin Graham advises you never to have more than 75% of your total assets in stocks.

But is putting all your money into the stock market inadvisable for everyone?

For a tiny minority of investors, a 100%-stock portfolio may make sense.

You are one of them if you:

• have set aside enough cash to support your family for at least one year
  
  
• will be investing steadily for at least 20 years to come
  
  
• survived the bear market that began in 2000
  
  
• did not sell stocks during the bear market that began in 2000
  
  
• bought more stocks during the bear market that began in 2000
  
  
• have read Chapter 8 of The Intelligent Investor and implemented a formal plan to control your own investing behaviour.

Unless you can honestly pass all these tests, you have no business putting all your money in stocks.

Anyone who panicked in the last bear market is going to panic in the next one - and will regret having no cushion of cash and bonds.

Ref: cc Intelligent Investor by Benjamin Graham