Why Your Portfolio Needs This Crucial, Unloved Friend

Think of a fixed deposit or a bond.

Let's be honest. Bonds are boring. There are no daily news stories about them. No hourly price updates. No minute-by-minute ticker changes. You cannot show off a bond to your brother-in-law at a family dinner. You cannot boast about your fixed deposit to your friends over drinks.

Here is the saddest part of investing. Bull markets-when stocks go up-last about 80% of a full market cycle. Bear markets-when stocks crash-take up the other 20%. This means that for most of your investing life, stocks make you feel smart. But here is the truth. You do not want to own an asset that makes you feel stupid for 80% of the time.

However, what that boring asset does during the remaining 20% of the time is very important. That 20% is the bear market. And when the bear shows up, you will be glad you have boring friends.

Why the Great Investors Love Cash

Some of the greatest investors in history swear by keeping a lot of cash. Think of Warren Buffett. Think of Seth Klarman. Think of Benjamin Graham, the granddaddy of value investing. These are not small-time traders. These are legends.

Why do they love cash? Because cash is not exciting. But cash gives you power.

Let me give you three advantages of always keeping cash in your portfolio.

First, cash minimizes damage. When a bear market hits, stocks can fall 30%, 40%, or even 50%. If all your money is in stocks, you lose a lot. But if you have 25% in cash, your total portfolio falls much less. Cash acts like a cushion. It protects you from the worst pain.

Second, cash gives you dry powder. This is a fancy term for "money ready to use." When markets crash, stocks go on sale. It is like your favorite store having a 50% off sale. But you cannot buy anything if you have no money left. Cash lets you buy stocks when they are cheap. Everyone else is scared. You are busy shopping.

Third, cash changes your mind. This is the biggest benefit. When you have cash, a crash stops being a tragedy. It becomes an opportunity. Instead of thinking, "Oh no, I am losing everything," you think, "Great, now I can buy low." That shift in thinking is priceless. It helps you sleep at night. It stops you from making panic decisions.

How Much Cash is Ideal?

So, how much cash should you keep? The answer is different for every person. Some very careful investors go as high as 75% cash. But for most of us, that is too much. You do not want to miss out on stock market gains completely.

A better answer is this: keep an allocation that is sizeable enough to matter. A good rule of thumb is a minimum of 20% to 25% in cash or very safe bonds.

Why that range? Because if the market drops 40%, a 25% cash portfolio will only drop 30%. That is a big difference. Also, you will have real money to deploy when the sale begins. Twenty-five percent of a large portfolio is a serious amount of dry powder.

The Bottom Line

We all love the thrill of a winning stock. We love telling stories about the 10-bagger we almost bought. But true wealth is not built on excitement alone. It is built on discipline.

The hardest trade is not finding the next big winner. The hardest trade is holding the boring thing that does not hug you back. It is holding cash or bonds when your friends are getting rich on paper. It is waiting for the 20% of the time when the bear shows up, and everyone else is crying.

That is when your boring friend saves you. So keep some cash. It does not love you back daily. But when the storm comes, it will be the only thing holding your hand.

Happy investing.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter
Quantum Information Services Private Limited (Research Analyst)