[akor]

For people who advocate purchasing depressed assets if/when things take a turn for the worse how do they hold the "cash". It seems the choices are lose cash to inflation or put it in some investment vehicle that ties up the cash for some period of time or has a different risk profile. I've heard some people advocate against never holding cash and borrowing against assets (ex: real estate) but that puts you at the mercy of the lender. If you hold literal cash what percent of the total portfolio makes sense? TIA

[jandrewrogers]

I keep relatively little cash, mostly just enough to cover bills for several months. There are many ways of having cash available in a downturn, beyond holding cash, with their own tradeoffs. Borrowing against assets doesn't always work because lenders can and do freeze lending to manage their risk during a major downturn. Bonds used to be a good place for uncorrelated liquidity during a stock downturn but this is no longer the case and they are essentially cash-equivalent at this point because they have no yield; I've seen literature in recent years suggesting bonds as they exist today serve no purpose in a well-designed portfolio because you manage risk better with options.

In current market conditions, hedging (e.g. buying put options) is one of the more effective ways to have cash available in a downturn while still being invested in long-term upside. If the market crashes, these hedges become worth a lot of money, which you can then sell and invest the proceeds in whatever you wish. Hedging isn't free, so if a crash never happens it eats into your returns for the year -- it is an insurance policy and you have to pay a premium. On the other hand, if the market has a great year the gains will greatly outweigh the losses from hedging. The worst case outcome is if the market is completely flat -- no gains but you still pay the hedging costs.

FWIW, I tend to be ~100% in individual equities, even for money I intend to use soon. Managing stock price volatility and cash flow does not require exiting stocks.