Keep cash or invest? The 4 deciding factors during COVID-19 crisis.
It’s always a dilemma for a lot of people when it comes to the question of how much cash or investment one should have. If you have too much cash, it might not be beneficial for a long term planning. While having sufficient cash is crucial for times when you need it quick! Especially during this pandemic crisis where some are having difficulties with maintaining their cash flow while the market has been the lowest in the decade now! So what should one do?
Should we keep cash in bank or invest during this COVID-19 crisis?
Here are the 4 steps to determine whether you should keep your cash or invest and financial instruments are suitable for the different scenarios:
1. Can you afford to stop working for at least 5 years?
If today you were forced to retire from work due to health reasons or accidents, can u afford to stop working for at least 5 years without having financial worries? Can you be certain that your household expenses and all the monthly loan repayments can carry on as usual? If the answer is No, then one is not fit to start their investment journey but should focus on income and wealth protection. Insurance will be a good vehicle to suit this need.
2. Healthy cash reserve
Make sure that you have healthy cash reserve in your bank account…..an amount that is sufficient to sustain your loans and living expenses between the period of 3-6 months. This is essentially important during economic crisis where a lot of people went out of job. Besides, having a healthy cash reserve ensures one has the financial cushion to pay an unpredictable expenses such as parent’s medical expenses, sudden breakdown of car, etc… One who has no cash reserve may fall into unnecessary high interest debts in the event of emergency.If you have always been recording and keeping track of your cash flow, great job! Please continue to do so. But if you have not, this is the best time to start!
1. Use an excel spreadsheet to categorize you expenses and see where you are spending your money
2. Set a cap to each category and FOLLOW STRICTLY
Cash for minor emergencies are recommended to be placed in instruments that is capital guaranteed, offers high liquidity (able to be withdrawn with 24 hours) and still able to provide some interest while the cash is kept there. Most of us would always think of fixed deposits as the tool for emergency fund. However there are some alternatives such as money market which is very suitable too. Though it is not often heard, it does offer similar interest to Fixed Deposit. Interest is calculated daily and depositor has the option to cash out anytime without loosing off the interest. This is unlike Fixed Deposits where one must hold till the maturity date to be paid the interest. Money Market is very suitable for corporate to keep cash as it interest generated is Tax Free, unlike Fixed Deposits where Corporates need to pay Tax on interest earned.
3. Investment goal and tenure
Cash for minor emergencies are recommended to be placed in instruments that is capital guaranteed, offers high liquidity (able to be withdrawn with 24 hours) and still able to provide some interest while the cash is kept there. Most of us would always think of fixed deposits as the tool for emergency fund. However there are some alternatives such as money market which is very suitable too. Though it is not often heard, it does offer similar interest to Fixed Deposit. Interest is calculated daily and depositor has the option to cash out anytime without loosing off the interest. This is unlike Fixed Deposits where one must hold till the maturity date to be paid the interest. Money Market is very suitable for corporate to keep cash as it interest generated is Tax Free, unlike Fixed Deposits where Corporates need to pay Tax on interest earned.
Accumulation for any goals with tenure of less than 24 months should only be placed in short term deposits like fixed deposits or money markets like stock market. In that way one may be able to gain some interests over a short period while avoiding any risk of losing the capital. Investing money which is needed in a very short period renders you in high risk of having to cash out at a loss, in the event market condition is terrible, like this COVID-19 Crisis.
3. Investment goal and tenure
Cash for minor emergencies are recommended to be placed in instruments that is capital guaranteed, offers high liquidity (able to be withdrawn with 24 hours) and still able to provide some interest while the cash is kept there. Most of us would always think of fixed deposits as the tool for emergency fund. However there are some alternatives such as money market which is very suitable too. Though it is not often heard, it does offer similar interest to Fixed Deposit. Interest is calculated daily and depositor has the option to cash out anytime without loosing off the interest. This is unlike Fixed Deposits where one must hold till the maturity date to be paid the interest. Money Market is very suitable for corporate to keep cash as it interest generated is Tax Free, unlike Fixed Deposits where Corporates need to pay Tax on interest earned.
Accumulation for any goals with tenure of less than 24 months should only be placed in short term deposits like fixed deposits or money markets like stock market. In that way one may be able to gain some interests over a short period while avoiding any risk of losing the capital. Investing money which is needed in a very short period renders you in high risk of having to cash out at a loss, in the event market condition is terrible, like this COVID-19 Crisis.
4. Risk appetite
Risk appetite is referring to the acceptance of an investor to capital looses in their money. Those with high tolerance can accept looses up to 30% or even higher while those with low tolerance can barely accept 5% losses.
Each savings or investment instruments like share have its pros and cons, thus understanding your own risk appetite is very important to determine the suitability of different financial vehicles to your risk tolerance. Diversification into different vehicles will be very helpful.
There are many factors that determine your risk appetite:
- Income and expense
I may start to sound like a broken record now, but the higher is your income and the lower is your expenses, the higher the risk you are allowed to tolerate in your portfolio management. This is because any setbacks in your investment portfolio will not affect your ability and capability to invest further. With high level of cash flow, one will have more bullets to take advantage of the low market… the ability to dollar cost in investment is essential to average down the cost of investment.
For those with very tight cash flow, it is best to keep cash.
- Nearness to your goals
But if your goals are near to you, you may want to stay secured and reduce your risk to as low as possible while maintain a better rate. Hence Fixed Income or Fixed Deposits will be the suitable instruments.
The time left for the realization of your financial goals also determines your risk appetite. If you still have plenty of time from meeting your goals, you are allowed to expose to higher risk investment allocation. This will help you to build up your wealth over a long term, if invested in the correct sector.
- Insurance coverage
Cliché, but true. Your risk appetite will be dependable on whether your coverage is sufficient. When major emergencies happen like we mentioned earlier, with sufficient coverage, your portfolio will remain sustainable as you do not need to withdraw any of it while your wealth continues to accumulate.
Those without any proper insurance to leverage and protect their assest, they should keep cash. While those who has sufficient coverage can invest their money without worrying of having to cash out at loss during health emergency.
- Age
As we mature, our risk appetite will generally decline too. If one is still young, one will have large number of working years to invest and build up our wealth, thus relatively younger ones can be exposed to higher risk vehicles. While if one is more mature and approaching retirement, a more prudent portfolio will be more suitable as a slight dip in the portfolio will have a great impact in the overall retirement fund.
- Knowledge and experience
When one has more knowledge on certain investment tools, the more comfortable one is with the exposure. By understanding more about the pros and cons of each investment will increase investors’ awareness and thus increasing your risk appetite.
Investors that has gained great returns with certain tools will generally be more keen to stick to the particular investments while those who got burnt before have a tendency to keep cash. However, getting burnt should not stop one from investing their money. Instead one should seek for professional advice and understand the investment philosophy well.
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