If the share market is declining, is cash the best defence? Is cash truly king in that situation?
The Argument For Cash
If the Australian share market, perhaps represented by the exchange traded fund (ETF) BetaShares Australia 200 ETF (ASX: A200), fell by 10% you’d be left with 90% of what you had before.
But if 10% of a portfolio were cash with the rest as ASX shares and the ASX fell 10% then the portfolio would only fall 9%. The portfolio with some cash would then be able to buy some cheaper shares.
So it’s clear that not only can cash be useful for market decline protection, it can be used for opportunistic share buying too.
Argument Against Holding Cash
But the reverse is true when the market is going up. When the share market is going up and you’re holding cash you’re missing out on the growth.
No-one knows when the share market is going to fall 10% or more. Holding cash is even more painful at the moment because of how little it’s earning in the bank. Holding cash was okay when it was earning 5% or more. But now cash is purely just a capital protection tool in investment terms.
There are two other areas that investors consider defensive assets, There are bonds, where a government or business is essentially taking a loan from us and paying us interest. Vanguard has one called Vanguard Australian Fixed Interest Index ETF (ASX: VAF).
Bonds have the potential to go up in a share market decline, but bonds won’t produce strong returns over the long term beacused of their fixed interest nature.
The other option is gold. On the ASX we can buy gold miners like Evolution Mining (ASX: EVN), Resolute Mining (ASX: RSG) and Newcrest Mining (ASX: NCM). For some reason people think the gold price should go up when the share market goes down. So, because people believe that theory, it does happen.
But the opposite happens too. When the share market goes up, gold (and the miners) usually go down.
Summary
So if you want something that goes up when shares go down which you could then sell to fund cheap share purchases then gold could be an idea.
But I prefer the idea of keeping a bit of cash in a high interest savings account to take advantage of any declines. I’d prefer my ‘defence’ to not decline as share markets steadily go upwards over time.
If you’re worried about share market declines then reliable shares like the ones in the free report below are what you might need in your portfolio.
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