Rhinophobia is an investor disease: the fear of having cash. The rhinophobic feels that all his “ money in stocks ” must be fully invested at all times.

Let’s say you are an individual investor and you have settled on an asset allocation of 60% in stocks and 40% in bonds. So if your total investable money is $ 100,000, then $ 60,000 is your “ equity. ”

Question: Should all of your stock money always be invested in stocks? If you answer “Yes”, you have rhinophobia and should see a doctor. Or just read the rest of this article. Because the best answer, which is more likely to keep you financially healthy, is “No.”

It’s an unfortunate myth in the stock investing industry, including many pundits and mutual funds, that the smartest investors fully invest at all times. In other words, they invest cash as soon as they get their hands, “they never sell,” and if they do sell, they reinvest the proceeds immediately. This myth is obviously a corollary of a dogmatic Buy and Hold ideology.

The reason the myth is unfortunate is that it causes people to lose money. It’s why so many investors who were fully invested when the market peaked in early 2000 stayed fully invested as the market went completely down over the next three years, rather than exiting until the crisis stopped. . It is also the reason why many of them will remain fully invested the next time a bubble bursts or a bear market catches them.

Even those who perceive themselves as the most conservative stock investors (“value” investors with a Buy and Hold inclination), in fact, calculate their moves to avoid rhinophobia. They do so when they decide not to buy a stock because it does not meet their valuation criteria (” We are expecting a better price ”), or to sell a stock because it has reached its target price (” We think this stock has had its streak ; we are very disciplined when it comes to selling when a stock reaches our target price ”). They are actually practicing a form of timing (cover your children’s eyes here).

If you ask the average informed investor what Warren Buffett’s investment style is, they will likely say, “Buffett is a value investor with a buy and hold approach.” And in general, that would be accurate. But Buffett avoids rhinophobia. Here’s what he said in his 2003 annual letter to Berkshire Hathaway shareholders: “Not participating is no fun. But sometimes, investing successfully requires inactivity. ” As recently as May 2006, Forbes magazine reported that “ Buffett, much to investors’ chagrin, is sitting on a mountain of cash and bonds (50% of Berkshire’s market value) waiting for better opportunities. ”

Why would that bother Berkshire Hathaway shareholders? Buffett obviously knows what he’s doing, judging from his track record over the past five decades. After all, he is the richest person in the world whose wealth comes entirely from investment. What any “annoying” shareholder is forgetting, and he is not, is that Rule # 1 in investing in stocks is, “Don’t lose money.” Sometimes not losing money requires the Sensitive Investor to put their “ money in stocks ” in cash, not stocks.

If, for whatever reason, you sell a stock, there may be times when you don’t want to immediately reinvest the money. Rather, you may want to keep it in cash for a while, until conditions change for the better. The same is true if you have new money. Don’t be afraid not to invest. If you can’t find enough good spots for your ” equity capital, ” leave it in cash until valuations improve, market conditions change, or discover a promising new investment opportunity.

In other words, your strategy as a sensible stock investor must include a cash strategy. To manage a portfolio of stocks wisely, cash is a legitimate place to park your ” money in stocks ” when:

o You are in a generally declining or lateral market; nothing seems to be working right.

o You are in a deflating bubble, like the 2000-2002 deflation of the bubble of the 1990s.

o Great investment opportunities in stocks are not appreciated.

o You are in protection mode.

When you are an individual investor, it is like running your own business or mutual fund. You want to run it smartly. Now the great companies you invest in don’t ignore the right moment to run their own businesses. They don’t mindlessly jump ahead with relentless product introductions, marketing campaigns, and acquisitions, regardless of the economy, interest rates, and conditions in their own industry. Sometimes they hold onto their investable cash (retained earnings) waiting for good opportunities. They study their markets, identify trends and changes in their industry, and adjust their actions through an ongoing process of strategic evaluation. They handle risks this way.

Expect nothing less of yourself as an investor. Why would you passively hold onto all of your stocks during a prolonged period of apparent market decline, such as 2000-2002? Has no sense. It is rhinophobia, a disease that will make you poorer.

Don’t be rhinophobic. The return on your investment will be much better if you are vaccinated against this disease. Please do so with caution. Be willing to invest new money when you identify a promising opportunity, but don’t feel the need to invest fully all the time. Cash is fine as long as there are no good opportunities.