The relentless rise in stock prices since 2009 have conditioned me to think that prices would only keep going up. As a result, I am, fearful that if I do not put money in stocks as soon as possible and keep cash instead, I am going to miss out. In reality, I need to step back for a couple months, and reassess the situation as an impartial observer.
This is not a call on the general levels in stock prices, as I do not know where they are going. It is mostly an observation which is specific to my own situation. I need to have cash on hand, since emergencies happen. Of course, I might still wake up one day and buy something if I find a compelling value, like I did with IBM (IBM) last month.
If stock prices declined by 20% in the next month, I would likely be unable to participate fully in purchasing cheaper securities. However, if these stocks kept steady from there or falling further, I would be able to get a higher number of shares using the money I receive from various sources each month ( salary and dividends to name a few).
Therefore, I do not believe I need a 30% allocation to fixed income or cash, merely as a tool to buy shares in case they drop in values. My disciplined strategy of buying stocks every month works wonderfully on the way down. It also works on the way up as well, as long as there is value to be uncovered.
My portfolio allocation is entirely in common stocks, with less than 1% in fixed income equivalents like CD’s. I definitely need to have some fixed income allocation, but current yields are making this a foolish proposition. There is absolutely no place to go if you have cash, other than investing in businesses and real estate, which pay distributions to income starved investors. That being said, having some cash on hand can be helpful in case of emergencies. Luckily, all of my investments generate cash flow, which is deposited into my central cash account. As a result, if I did absolutely nothing for 1 year, my cash from dividend payments would increase to 3 – 3.5% of portfolio value by end of 2014.
In conclusion, I plan on accumulating some cash in my accounts, in order to work on rebuilding emergency funds, saving up the amount for 2013 Sep IRA, and potentially buying up options that could be exercised. This means I might not buy more stocks in December and maybe even January, unless i see some compelling values. The great thing about being a dividend investor in quality companies is that you can afford to sit on your portfolio and do absolutely nothing, while it pumps out cold hard cash into your account every week, month, quarter, year.
Full Disclosure: Long TGT, XOM, GIS