If you’re like me, you’re afraid of running out of cash to invest, as this would mean we would be sitting ducks if a sharp bear market were to come around. Even a regular market downturn of 10% to 15% may throw up enticing opportunities for us to deploy our capital. As a student of the market and an avid investor, I am also constantly learning about how to pace my purchases over time so as to not run out of cash.
My experience in investing through the global financial crisis (GFC) of 2008-2009 comes in handy here in this article as I will provide some guidance on how you can go about conserving cash and deploying them in the right securities and in the right quantities.
Buy slowly but steadily
The first rule to remember is not to sink in a pile of money just after a market crash, because we will never know the extent or duration of the decline. If we commit to one big purchase, this leaves us with no further ammunition to average down in the event of a sustained decline in share prices and valuations. The suggestion is to buy slowly and steadily, pacing out your purchases by deploying small amounts of capital.
Use the index level as a barometer for sentiment
The index here refers to a broad market index. In Singapore’s case, it could be the Straits Times Index (SGX: ^STI), which is a collection of some of the largest companies in our local market.
Investors should keep an eye on the index level as a rough barometer of market sentiment to know how much pessimism or optimism has been priced into the market. Understanding the level of expectations and comparing it to reality is important in knowing when to deploy cash – an undue level of pessimism usually presents opportunities to the astute investor who has done his homework.
Focus on a margin of safety
As stock prices or economic conditions deteriorate, it’s important for us as investors to continue to focus on attaining an adequate margin of safety. This means going for companies with certain qualities, some of which include (1) a strong business model, (2) a track record of weathering business cycles, (3) a robust balance sheet, and (4) healthy ability to generate free cash flow.
Always keep a handy cash buffer
Finally, we should always remember to keep some cash handy, and this means not drawing down on our buffer funds unless absolutely necessary. Good personal finance habits dictates having a cash buffer of at least six months of expenses, and we should adhere to this as far as possible, or else we may be forced to liquidate our shares at the worst possible time just to raise cash for an emergency.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.