“Cash is king” is a popular phrase used to emphasize the importance of liquid assets in investments.
With the plethora of knowledge on stocks, bonds, money market funds, retirement accounts and all other forms of investing, it’s easy to forget the importance money can have in your investment strategy.
When money is king, liquid asset investors can find themselves in a position to strike incredible deals.
The money referred to in the phrase “cash is king” does not just mean literal bills carried in wallets or hidden in piggy banks. It can also mean any asset that is not invested in, and therefore can be turned into real money without penalties or limits. Money in basic checking or savings accounts is considered cash, as is the rest under the driver’s seat.
The main reason money is king is because it is so liquid and accessible. A family that pays rent and expenses with returns on investment risks being broke if the investment bill suddenly plummets. Even if the family has US $ 100,000 (USD) in a retirement account, this money may not be able to save the family as it is illiquid and takes time to withdraw, at the expense of huge penalties. If, however, this family has an easily accessible cash reserve, they can continue to make payments and avoid problems like foreclosure while waiting to free up other assets for longer-term help.
For businesses, money can mean the difference between bankruptcy and living to fight another day. Since most companies use cash accounts to manage payroll, a sudden loss of cash can lead to serious problems within the workforce and the external market. Some experts cite the massive falls in stock prices during the 2008 financial crisis as a result in part of insufficient liquid resources, which forced companies to sell shares quickly, at a reduced rate, only to generate additional liquidity.
In addition to liquidity, money is king because it offers investors opportunities in markets that are negative for those with no liquidity reserves. When market prices fall due to panic, cash investors have the opportunity to scrape together normally expensive stocks at bargain prices, as their money is not tied to the investments hit by the crisis. Once market trends return, investors who believe money is king could find themselves with an extremely valuable portfolio.