Becoming A Better Investor: Cash Flows (Part 3 Of 5)

If you’re just joining us, you can catch up by reading Monday’s and Tuesday’s editions. In essence, the goal of the Becoming a Better Investor series is to simplify the investing methods employed by average individuals. Typical investors overcomplicate their portfolios, and pay for it when the market moves in a direction that wasn’t prepared for.

Today’s edition focuses on cash flows. Investors are highly encouraged to sacrifice the glitzy stocks and fancy derivatives in favour of straightforward, cash-producing securities. From U.S. Treasury bonds to low-yielding money market accounts, there are multiple ways to generate comfortable returns without the excessive volatility.

As mentioned previously, it’s suggested that 60% of a given investor’s portfolio should be in cash and cash-equivalents. While this may seem restrictive, it truly provides opportunity for creativity in cash flow generation. Consider the following possibilities:

1. U.S. Treasuries. Reliable, AAA-rated, and incredibly liquid. Generates predictable and consistent revenue stream.

2. Certificates of Deposit. Decent rate of interest and insured by the FDIC. Low transaction fees and high visibility.

3. Foreign Cash Holdings. Hold multiple currencies in multiple banks across the world. While this can create a headache for your accountant, it will allow your portfolio to weather some of the latent cyclicality in global trade and pick up the difference in interest rates.

4. Notes payable. These are often smaller loans issued with short expirations. They can provide a great opportunity to allocate sitting cash, as they generate decent-size returns.

5. Other securities with less than 3 months to expiration. They include, but are not limited to: commercial paper, municipal notes, foreign exchange swaps, and repurchase agreements.

The key to maintaining a reasonable return to any portfolio is establishing a base of consistent cash flows. Investors with dependable sources of new cash are freed up to make bigger commitments to capital retention and growth.

It’s often difficult for some to accept taking a sometimes-substantial reduction in return on a chunk of their assets, but this sacrifice can ultimately smooth out returns over the long-term. Indeed, seeking ways to exploit “parked cash” with interest-bearing accounts can have a noticeable affect on portfolio performance.

Agenda: Monday: Introduction; Tuesday: Basics; Wednesday: Cash Flows; Thursday: Reaction Strategies; Friday: Advanced Options


— Nick Smith

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