Recently the writer read the book Outperform – Inside the Investment Strategy of Billion Dollar Endowments by John Baschab and Jon Piot, John Wiley & Sons Inc, 2010. The book examines what lessons can be learnt from the people who manage the funds at the larger educational institutions.

One of the topics discussed was cash. The book is about endowments funds which have very specific methods of operations as opposed to individuals. Part of the operations is a liquidity notion, ensuring their portfolios generate part of the operating budgets of the institution. How do you look at cash? If you are a dividend stock holder, the stocks generate cash either to be reinvested or to take advantage to buy more dividend stocks or for other purposes. For many investors cash is not consider part of the asset allocation method, but if a downturn hits or money is needed what would be sold first? Not considering cash or equivalents is doing a disservice to the the portfolio.

In an ideal world you should have 18 months of operation in cash or liquid cash equivalents. Liquid means if you were to sell to generate cash what investments would you sell and not necessarily at a loss? In a high degree of portfolios, the method to make as much money as possible is to use leverage, if you are correct, you have done very well; if not, cash needs to be raised. Do you have a strategy for cash? If you own bonds and dividend paying stocks which have paid dividends for a number of years, you can project income into your portfolio. Cash needs to be part of the asset allocation model.

There are more questions than answers, till the next time – to raising questions