Cash is like air: it may not generate profit, but it can keep you alive! Rev 1.1

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Cash Is Like Air: It Cannot Generate Profit, But It Can Keep You Alive, Rev 1.1

Cash is trash, but it is also as important as air. Too much cash is useless, but having none can be fatal.

We hold cash so that when the market falls, we have money to live on and can avoid liquidation from borrowing accounts.

It is important to evaluate how much cash is needed for your risk level. But too much cash turns into trash.

Cash should be placed where it can be accessed at any time. For US investors, a brokerage account or a ROTH IRA older than five years can be accessed at any time. Cash in a traditional IRA cannot be used immediately if you are under age 59 1/2, or withdrawals may involve penalties and taxes.

US investors can use QLD and money market funds. Taiwan investors can use 00670L with cash (00864B) to reach beta 1.0.

So our definition of cash is cash greater than or equal to debt plus emergency reserves.

Emergency reserves:

1. People still working need only six months to one year of emergency reserves.

Leveraged Funds Are Best Held in Retirement Accounts

2. Retirees should gradually aim for more than ten years of emergency reserves before retirement.

Retirees who cannot yet reach ten years of reserves do not need to panic. In up-market years, sell a little of the 2x leveraged fund and slowly replenish the cash position. Debt should never be repaid if it can be avoided.

Whether retired or not, a current allocation can be 20% in 2x leveraged funds and 20% in cash.

As the market rises, rebalance every year, and the cash reserve can gradually exceed ten years. If you invest in QQQ and spend 2% per year, 20% cash already covers ten years of spending. With yearly gains and rebalancing, emergency reserves can exceed ten years.

Cash in a traditional IRA paired with leveraged funds in a ROTH account is mainly meant to slow growth in the taxable traditional account. This cash has a different function from emergency reserve cash.

Borrowing money and holding cash are not contradictory. Having cash is what lets QLD or TQQQ bring the total portfolio Beta to 1.0.

For example:

Person A has no cash and only $1,000,000 in QQQ.

Person B has $500,000 in QQQ, $500,000 in QLD, and $500,000 in cash.

Person B Has Cash, So Their Risk Tolerance Is Higher; Someone With No Cash Has Almost No Risk Capacity

This kind of preparation lowers risk and makes us more optimistic about market investing.

We know risk, understand risk, and control risk.

That lowers risk, makes investing safer, and allows us to borrow and invest with greater courage.

There is a difference between ignorant courage and courage that comes from controlling risk.

If you do not use leveraged funds, that is also fine. But if you hold cash without leveraged funds, your beta will be below 1.0. As long as you know this is the return you accept, that is fine.

There is no free lunch. If you want beta 1.0 and also want to hold a large cash position, you must pay a cost. The volatility decay of leveraged funds is that cost. Therefore, in up-market years, sell some leveraged funds each year and move them to cash, increasing cash and reducing leveraged fund risk for future downturns.

Leveraged funds in retirement accounts should also be gradually moved to cash when markets rise, so the cash position grows, risk capacity improves, and beta 1.0 can still be maintained.

During a market bubble decline, rebalancing can be done moderately. For example, if we assume the market has a ten-year low, after three years of decline, we can reduce one year of emergency reserves, perhaps from ten years to nine years. When the market rises the next year, add one more year of emergency reserves, until ten years are restored. Or if the market falls 30% or 40% within a year, risk at low market levels has decreased, and two years of living expenses can be invested in the stock market.

For retirees with no income, the cash reserve should ideally be built during up markets by selling leveraged funds into cash until cash is greater than or equal to pledged stock borrowing, excluding mortgages and personal loans, plus more than ten years of living expenses, paired with 2x leveraged funds.

For people still working, cash should be greater than or equal to pledged stock borrowing, excluding mortgages and personal loans, plus one year of living expenses. Before retirement, gradually build the number of years of cash emergency reserves so that by retirement it reaches more than ten years. Ideally this is paired with 2x leveraged funds so investment beta remains 1.0.

Retirees whose cash is far above debt plus emergency reserves can gradually raise reserves higher as markets continue rising. More is better. People still working need at most one year of emergency reserves, while those retiring within several years should raise reserves year by year until cash is far above debt plus more than ten years of living expenses.

If the Market Has Already Fallen Sharply, the Risk Is Lower, and Two Years of Living Expenses Can Be Invested in Stocks

How much cash to prepare depends on each person's assets, loan amount, and desired risk tolerance. Some people want three years, some want five years. It is not that they do not want more; their assets may not allow it. If assets are large enough, emergency reserves after subtracting debt can reach 10, 20, or even 30 years. It depends on each person's assets and situation.

As a rough retirement standard, you need 33 years of living expenses in assets, or at least five years of living expenses in assets to be eligible for retirement. Ten years of living expenses in cash is at most one-third of assets equal to 33 times annual spending, paired with one-third in 2x leveraged funds. For assets equal to five years of living expenses, one-fifth, or 20%, can be cash, one-fifth, or 20%, can be leveraged funds, plus cash reserves equal to pledged stock borrowing.

Cash is like a reservoir. It can be adjusted according to market conditions. The larger the reservoir, the better your ability to adjust.

We still try to maintain beta 1.0, so the cash position should be paired with 2x leveraged 00670L or QLD. If you reserve 1,000,000 in cash, invest 1,000,000 in 00670L.

When the Cash Position Is Sufficient, Future Market Volatility Can Be Managed More Strongly

For example, if you currently have three years of emergency reserves, say NT$2,000,000, then you should also have NT$2,000,000 invested in 00670L. Or if you start with five years of emergency reserves, say NT$4,000,000, then prepare NT$4,000,000 in cash and NT$4,000,000 in 00670L.

If the market keeps rising, each up year you can move half of the appreciation in 00670L to cash. Over several years, five years, or ten years, the rising market should let you gradually accumulate more cash assets.

Our final goal is for cash to be greater than or equal to pledged stock borrowing, excluding mortgages and personal loans, plus more than ten years of living expenses. You may not reach ten years at the start, so begin with three or five years and build toward the target over time.

When the cash position is sufficient, your ability to adjust to future market volatility is stronger.

Taiwan investors can keep cash in 00864B. US investors can keep it in money market funds.

Know risk, understand risk, and control risk. With that foundation, buy the US Nasdaq 100 index fund whenever you have money, treat it as a fixed asset, and never sell. If you never sell, you have no capital gains tax. When assets are large enough, you can live on securities-backed borrowing. If borrowed money does not have to be repaid, do not repay it.