Q: Should you hold cash in your portfolio?

Retail investors should learn to keep a portion of their funds liquid so that when a good investment opportunity comes along, they will be in a position to take advantage of it. They are usually in a loaded up condition, meaning fully invested at all times.

Well, I can understand the rationale for them doing so. Because the premise is that since the market will more likely than not be higher than now, every dollar should be used to grow it. They are not wrong to assume so, but they will also have maximum exposure to market drawdowns that happen from time to time that erode their gains. And sometimes, they may be sitting on paper losses which mean that in order not to realize the losses, they have to commit the cash on those existing positions and forgo other upcoming opportunities. And this may take a pretty long time.

In our Moneyball Investing methodology, we look at our investing capital just like the way merchandising works. For goods that become slow moving and cannot be clean out in the departmental stores, it is actually holding up our capital to produce the goods. Not only are we not able to make a profit out of those produced goods, we are also forgoing the chance to make more profits from other possible new products that could have been on the shelf. This is something that many retail investors do not realize. You would always want to leave some shelving space and capital around, because opportunities come pretty often.