As an investor, it is extremely difficult when it comes to capital allocation. On one hand, investors will always prepare a war chest that they can deploy when the market plunges out of the blue. Yet, it is also true that our capital has to be deployed in order to yield profits and capital gains from other investments. This situation puts most of us in a dilemma because there is never a right or wrong answer. However, it is also true that the longer you hold onto your capital, the longer you will stand to not gain from the market. The same can be said for the losses that you might experience if you did deploy hurriedly or out of FOMO. In today’s post, I would like to share my personal experience and perhaps reveal how much % of my capital is still reserved in my war chest and why.
Value security and my preparedness
I am never sure of what is to come or how the market will react tomorrow because of a sensationalized news item. Therefore, I always take a logical approach when I decide to invest in a particular asset. Usually, I will trade several times before I decide to invest for the longer term. This is because I want to earn a margin of safety from my trading profits before I allow my stock value to be determined solely by the market. This allows me to have a clear view of my assets and allows me to be more objective when I am considering putting more capital into a particular asset or stock. As such, I do not worry so much about losing out but rather I am always thinking of how I could make every trade a logical move as much as possible.
Percentage over the absolute amount
At the moment, I am holding around 35% of my capital in cash because I expect more downsides in the market for the sectors that I am vested in. During downtimes, I will go as far as 20% in cash to further reduce my capital risk and will suspend any further increments in my watchlist to prioritize my current assets. This style of allocation might not work so well for everyone as we might differ in terms of our actual cash balance but so long as your allocation plans allow you to set aside cash for your necessities and allows you to sleep soundly at night, then stick with it.
Planning ahead is tough but do not give in to impulsive behaviors
Sometimes the thought of losing out is overwhelming even when you are an experienced investor. That said, the worst thing you can ever do is to act out of impulse. As such, never find a reason to do it even when your level of capital efficiency is low at the moment. Instead, continue to plan and adjust if necessary to optimize your capital allocation. Usually, when my war chest has been dormant for quite some time then I will expand on my watchlist to include another stock from my reserve list.
Closing thoughts
The fact is that we will never be able to deploy all of our capital and be “happy” about it 100%. That is also the reason why I feel that investing is very expensive in nature. Thankfully, our savings account interest rates have been rising but they will not be able to even beat inflation.
