In my previous post, I indicated that one of the rationale people don't believe holding cash is of any good and I pointed out that holding cash actually gives one the leverage to take advantage of the opportunities when the Big Kahuna arrives, as you would be out of ammo if you are already too deep into equities when the main event arrives. To show what that leverage provides, here's a mathematical example of the contrast between a bear and a bull case.
Under the Bear Case, the assumption is that the ASX200 tanks 28.5% in mid 2020 which takes it just above the Feb 2016 low around 4,800. Assuming one holds 10,000 XYZ shares which he now sells for $1.50, and he uses the $15k to park in a 6 months TD at 1.8%, when the fall happens, XYZ falls by 40% [they tend to overshoot the market] and with his cash, he buys back at 90c with the $15k+interest giving him 16,817 shares. 18 months later, the market recovers and XYZ rebounds back to its original $1.50 and his investment value rose to $10,225 giving him a 68.2% return. The Buy and Hold participant however is also vindicated, see I told you the price of XYZ will bounce back and indeed it did, 18 months later his investment value remained $15k as he still had his 10k of shares.
Under the Bull Case, the assumption is that the ASX200 instead of tanking actually climbed a wall of worries but low interest rates ensured that it generated a modest 12% growth over the next 18 months. But XYZ shares performed better than the general market and put on 25% over that time frame. His investment grew from $15k to $18.75k or 25% return.
Both Bear and Bull Case are possible over the next 18 months, but had you not have any cash during the main event, you wouldn't have a seat to gain the 68% return in the Bear Case. And this is the power of Cash in the troubled times ahead.
|
Column 1 |
Column 2 |
Column 3 |
Column 4 |
Column 5 |
Column 6 |
| 1 |
BEAR CASE |
Current Price |
Price after crash [6 months to crash] |
Post-crash [18 months later] |
$Gain over not selling |
% Gain over not selling |
| 2 |
Hypothetical stock XYZ |
$ 1.50 |
$ 0.90 |
$ 1.50 |
|
|
| 3 |
Investment value with 10,000 shares |
$ 15,000.00 |
$ 9,000.00 |
$ 25,225.00 |
$ 10,225.00 |
68.2% |
| 4 |
% market fall |
|
28.5% |
|
|
|
| 5 |
Stock % fall |
|
40.0% |
|
|
|
| 6 |
ASX200 after fall [Feb2016 low] |
|
4,787 |
|
|
|
| 7 |
No of shares $15k buys |
|
16,816.67 |
|
|
|
| 8 |
|
|
|
|
|
|
| 9 |
BULL CASE |
Current Price |
|
Price [18 months later] |
$Gain over not selling |
% Gain over not selling |
| 10 |
Hypothetical stock XYZ |
$ 1.50 |
|
$ 1.88 |
|
|
| 11 |
Investment value with 10,000 shares |
$ 15,000.00 |
|
$ 18,750.00 |
$ 3,750.00 |
25.0% |
| 12 |
% market gain |
|
12.0% |
|
|
|
| 13 |
Stock % gain |
|
25.0% |
|
|
|
