Today, the Dow Jones Industrial Average closed at 12,861, and it seems like 14,000 points on the DJIA was just yesterday. As fund managers and investors sell off their holdings due to fear of sub-prime and prime lending practices, I encourage you to seek out “stocks on sale,” securities that trade with a substantial margin of safety. However, without adequate cash holdings, buying stocks at a nice discount becomes increasingly difficult.
Make Cash Part of Your Regular Investment Portfolio
Cash serves as an important part of your overall portfolio. If properly invested, cash and similar short term investments reduce your portfolio volatility, substantially controls risk, and earns a fair return of 4.5%+ that's backed by the FDIC.
Four Quick Ways to Raise Cash
In no particular order, there are a few quick and easy ways to raise some cash for potential buying opportunities:
- Sell off underperforming positions – I made a mistake when I bought Blackstone Group at $32. BX fell below my 25% trailing stop, so I sold off my holdings. If you have any underperforming stocks and can think of better uses for the money, sell off the investment and build up your cash position.
- Transfer Money from Savings – Traditionally, we use our savings accounts for long-term purchases, big ticket items, and other costly expenditures. But what about using your savings to create more money? I'm not saying cash out your entire nest egg and invest in the stock market. On the contrary, use savings to purchase a few positions you have been watching for some time at discount prices. Eventhough the stock market as a whole is struggling, there are still plenty of bargain stocks available within the marketplace.
- Sell Covered Calls or Puts – For investors like myself who aren't comfortable with shorting stocks, selling puts is a safer way to profit from downtrending markets like the current DJIA environment. Best of all, you pocket the insurance coverage once you sell, which can be reinvested elsewhere or saved up for your next big investment decision.
- Pay off Consumer Debts – For some investors, paying off debts will free up more cash in the short term than investing for a return will. If you pay out a couple hundred dollars per month on credit cards, auto loans, and other consumer debts, paying extra payments toward your debts will kill the principal faster and reduce your monthly payments. A good debt reduction plan can save you an extra $50 or $100 per month.
Always Remember Cash is King
These are some of the ideas I thought of, and I'm sure you know many more ways to raise some cash for investment purposes, too! No matter how you build up a cash position for investing, cash is and always will be an integral part of your investment portfolio. You are powerless if all your money is tied up in the markets or sits motionless in a 1-year certificate of deposit.
I've come to realize why so many professional investors stress the importance of a large cash position: for volatile times like these when stocks are on sale.
Where will my cash go? HMIN, VCLK, & EDU have caught my eye. Which stocks smell “BUY” to you?